An insidious form of manipulation of oil prices

Giant oil companies, banks and investment houses have invented other blatant ways of pushing up oil prices, aside from monopoly pricing and speculative trading in oil futures.

By BENJIE OLIVEROS
Bulatlat.com

I have written a number of articles on how pump prices of oil are being kept high. Let me summarize the main reasons:

First, there is a monopoly of oil. The big oil companies – Exxon Mobil, Royal Dutch Shell, BP, then Chevron Texaco in fourth, which is followed by the relatively smaller oil companies such as Total– are vertically integrated. They control the production and distribution of oil and natural gas: from exploration, extraction, refining, distribution to your friendly gasoline station. Since they control the supply, they control the prices.

The days when the Organization of Petroleum Exporting Countries was able to control the production and price of oil, such as in the 1970s, are long gone. Remember that in 2008, during the peak of spikes in oil prices, announcements by OPEC of increases in the production of oil did not temper prices.

There are those who claim that because the production and sale of oil and gas are not being controlled by only one company, there could be no monopoly pricing. They are, after all, in competition with each other and competition lowers prices. This is the same argument of the Philippine government in justifying the continued implementation of the Downstream Oil Industry Deregulation Law. While it is true that giant oil companies compete against each other, they act as one in setting prices. One could readily observe that oil companies always announce that they are raising the pump prices of oil one after another. The time lag between the announcements of price increases by the different companies is only a matter of hours. I have also written about the experience of my nephew whose first work was as manager of a gas station. He was told by the owner of the station that they are being forbidden by the oil company from undercutting other gas stations in the vicinity even if these were carrying a different brand and were being supplied by a different oil company. Do we still need proof that giant oil companies set the price of oil in conjunction with each other?

Second is speculation. Oil is a commodity of choice – second is gold – by traders and hedge fund managers, especially after crisis strikes. And those trading in oil futures, majority of which are not users of oil, take advantage of both negative and positive events to push prices up through frantic trading. Read today’s article “OPEC oil prices continue to rise” by the Philippine News Agency| Xinhua. It enumerated three reasons why oil prices are going up: First is the geopolitical crisis due to tensions between the US and Iran. It said Iran is the second biggest exporter of oil and that the country controls the Strait of Homuz, the most important transport line of crude oil. Even so, has the conflict escalated already such that the world is already experiencing a supply shock? If there is still no war, and therefore, no acute shortage, why are the prices increasing now?

Second, the article said “The rise of the euro due to progress made in resolving Greece’s debt crisis coupled with the falling dollar promoted investment in crude oil futures, thus lifting prices.”

Third, “oil prices were boosted by positive economic figures from the United States.” This means, there is “anticipation” of an increase in gasoline consumption in the US because of an improving economy. But still, this anticipated increase in demand has not yet happened and traders, mostly hedge fund managers, and sellers, the giant oil companies, are already cashing in on this.

When this author published two recent articles “The invisible hand of monopolies,” and “How can we stop oil companies from profiteering,” a reader Earl Richards wrote a feedback and mentioned several articles that tackle how the prices of oil are being pushed up artificially. One article, which Earl Richards recommended, caught this author’s attention. The article is “The Global Oil Scam: 50 Times Bigger than Madoff” written by Philip Davis and published at the website Seeking Alpha, revealed two disturbing facts.

First, the Intercontinental Exchange or ICE was founded in 2000 by Goldman Sachs (GS), Morgan Stanley (MS), BP (BP), Total (TOT), Shell (RDS.A), Deutsche Bank (DB) and Societe Generale (SCGLY.PK). The ICE and the New York Mercantile Exchange (NYMEX) are “clearing houses” where oil futures, or technically oil contracts for delivery at a later date, are being traded.

The NYMEX is supposedly a regulated market, which deals with light, sweet, crude or the West Texas Intermediate oil. However, it is doubtful how regulation in the NYMEX is being done especially after the deregulation of the financial sector in the early 1990s. In a research, “Who is in the oil futures market and how has it changed?” written by Kenneth B. Medlock III in 2009 revealed that in the NYMEX, an equivalent of 600 million barrels, which is about seven times the daily volume of current oil demand, is being traded everyday. He also revealed that there are two types of traders in the NYMEX: the commercial traders, who include the producers and consumers, and the non-commercial traders, who include the speculators and financial institutions.

The ICE, on the other hand, deals with Brent crude or north sea oil. The ICE is unregulated because technically it is not based in the US but in London; it specializes in over-the-counter (OTC) trade; and it is an electronic trading platform. Add this to the fact that ICE was founded by a combination of hedge fund managers, banks, and oil companies and you have the perfect formula for speculation. The cabal of speculators in oil futures and the giant oil companies practically has a free hand in the ICE. So the result is frantic speculation and manipulation of prices in the ICE.

The article “Global Oil Scam” revealed an insidious form of manipulation of prices going on in the ICE: “round-trip trade.” Davis wrote, “Round-trip trades occur when one firm sells energy to another, and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. This is nothing more than a massive fraud, pure and simple.”

According to Philips, two players in the ICE oil futures market admitted that they are engaging in round-trip trades, when investigated by the US Congress. DMS energy, according to Philips, admitted that 80 percent of its trades in ICE in 2001 were round-trip trades. Duke Energy, on the other hand, admitted that it engaged in round-trip trades in the amount of $1.1 billion.

Round-trip trades create artificial demand that pushes up the price of oil.

Monopoly pricing by giant oil companies keeps prices high – or overpriced way beyond actual costs and actual demand – and, together with speculation by hedge fund managers and banks, take advantage of international events, which have not yet created an impact in demand or supply, to push prices further up. Round-trip trades are more insidious because it is being done arbitrarily, with or without events that could potentially create a supply or demand shock. And round-trip trades are made possible by ICE, which is a creation and an instrument of giant oil companies, hedge fund managers or financial investment houses, and banks to profit from the sufferings of the peoples of the world.

There is an idiom in Filipino that describes a situation where one is being manipulated or fooled: “being cooked in one’s oil.” Round-trip trade is worse because price increases could be done with no justification at all, imagined or otherwise.

Would we allow this to continue happening or would we begin making our voices heard?

Some, especially governments, say that we could do nothing about the spikes in oil prices. That is a lot of bull because prices are being artificially pushed up due to the insatiable greed for profits of giant oil companies, speculators, financial investment houses and banks and not by any supernatural, abstract entity that economists call as the market. And the only way to counter this is through political pressure, which governments would not do because they are being controlled by these very same giant companies, hedge fund managers, and banks. The only political pressure that would make governments, giant oil companies, financial investment houses, and banks take notice are gigantic protest actions, which demonstrate the collective will of the people.