In 2001 just before the dot.com crash in the NASDAQ, some Wall Street firms were pushing sale to the gullible public of stocks that their companies were quietly dumping. Or they were pushing dubious stocks for companies where their affiliated banks had a financial interest. In short, as later came out in Congressional investigations, companies with a vested interest in a certain financial outcome used the media to line their pockets and that of their companies, leaving the public investor holding the bag.
It would be interesting for Congress to subpoena the records of the futures positions of Goldman Sachs and a handful of other major energy futures players to see if they are invested to gain from a further rise in oil to $200 or not.
Margin rules feed the frenzy
Another added turbo-charger to present speculation in oil prices is the margin rule governing what per cent of cash a buyer of a futures contract in oil has to put up to bet on a rising oil price (or falling for that matter). The current NYMEX regulation allows a speculator to put up only 6 per cent of the total value of his oil futures contract. That means a risk-taking hedge fund or bank can buy oil futures with a leverage of 16 to 1.
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We are hit with an endless series of plausible arguments for the high price of oil: A "terrorism risk premium"; “blistering” rise in demand of China and India; unrest in the Nigerian oil region; oil pipelines' blown up in Iraq; possible war with Iran … And above all the hype about Peak Oil. Oil speculator T. Boone Pickens has reportedly raked in a huge profit on oil futures and argues, conveniently, that the world is on the cusp of Peak Oil. So does the Houston investment banker and friend of Dick Cheney, Matt Simmons.
As the June 2006 US Senate report, The Role of Market Speculation in Rising Oil and Gas Prices (pdf 527KB), noted, "There's a few hedge fund managers out there who are masters at knowing how to exploit the peak oil theories and hot buttons of supply and demand, and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self-fulfilling prophecy".
Will a Democratic Congress act to change the carefully crafted opaque oil futures markets in an election year and risk bursting the bubble? On May 12 House Energy & Commerce Committee stated it will look at this issue into June. The world will be watching.
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