The financial services industry (please, do not call what they produce financial products, please), and particularly those who deal in the commodities markets (you know, stuff like pork belly futures and concentrated orange juice futures — and oh, oh, what’s another good example? — oil and gas futures) are always quick to lay the blame for high prices on things like supply and demand. You recall Mr. Supply and Mr. Demand don’t you? Nasty little buggers one day, your best best friend the next — but I digress.

What is clear, however, these honest, hard working regular guys (like this poor fellow) would never ever manipulate the markets for their own benefit. High gas prices must be the result of that invisible hand, one which we must believe controls all our economic destinies.

Well, that’s their story every time they get caught with their hands in the cookie jar (i.e., cheating their asses off) in order to make big money for themselves, and damn the rest of us suckers who aren’t as bright or bold or sociopathic as they are. Like these guys:

WASHINGTON — A group of financial speculators made $50 million by manipulating the price of oil in 2008, the Commodity Futures Trading Commission charged Tuesday.

The civil charges are for alleged manipulation during the first four months of 2008, when crude oil was on its way up to the all-time high of $147 a barrel. […]

The CFTC complaint alleges that the three companies and two executives conspired — during a period of relatively tight oil supplies — to amass big quantities of oil for next-month physical delivery. They were dominating and controlling supply, even though they were not commercial users of oil.

Read more: http://www.mcclatchydc.com/2011/05/24/114711/speculators-charged-with-manipulating.html#ixzz1NvhYQpaA

You remember 2008, right? The economy was crumbling thanks to the housing market crash brought on by the reckless and unregulated speculation in the derivatives markets for CDOs (i.e., collateralized debt obligations). The world was on the brink of a financial crisis that would have rivaled if not vastly exceeded the Great Depression in scope had not the actions the Federal Reserve in late 2008, and to a larger extent those of President Obama in 2009, averted a complete meltdown of the financial markets. But as they say in the business, Money Never Sleeps.

It seems that in January of 2008, three companies that Parnon Energy Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) S.A., “allegedly” acquired ownership of large quantities of (i.e., millions of barrels) of crude oil even though they were not end users; by which I mean they didn’t acquire oil to refine it into petroleum products for sale on the retail markets. No, they saw an opportunity to grab ownership of vast amounts of crude oil and hold it in order to force the price up. They weren’t in the business of buying and selling crude oil for delivery to refineries or refining oil themselves. They were solely in the business of speculating on the price of oil. And as we all know, its best to bet on a sure thing than to gamble on a whom and a prayer.

They grabbed these millions of barrels of oil at a time when oil supplies were — as they say in the bizness — tight. they “allegedly” held this oil off the market until the final day when they were required to deliver the oil under the futures contracts they had purchased. What would be unusual move for a company that actually traded in oil futures as a hedge against future price increases and which needed the oil for their business operations was not so unusual for a group of corporations and their executives who wanted to jack the price up. In short, they “allegedly” intentionally held oil off the market to create the impression among other traders that supplies would remain “tight” and this benefit from the increase on crude oil prices when they did finally release the oil and deliver it for sale.

Now these “persons” are actually small potatoes in the grand stew of corruption that occurs every day in the commodities markets. They only managed to make a “killing” (i.e., profit) of $50 Million Dollars. Pikers in comparison to the thieves at Enron and its “partners in crime” who in 2000-2002 made Billions of Dollars off the manipulation of the western electricity markets, especially in California.

Still, I suppose its nice to see the federal government doing anything at all to investigate price manipulation on the oil and gas markets, especially after the sorry record of the Bush administration when the oil prices rose from $25 dollars a barrel to a high of $147 a barrel thanks in large part to deregulation of the markets and other actions to increase market speculation as it related to price of oil:

In April 2009, Dr. Ahmad R. Jalali-Naini, working under the supervision of Mohammad Alipour-Jeddi, Head of the Petroleum Studies Department for the Organization of the Petroleum Exporting Countries, prepared a seminal report entitled The Impact of Financial Markets on the Price of Oil and Volatility: Developments since 2007. Based on his findings therein he concluded, inter alia, that speculation in oil futures markets contributes significantly to price volatility and observed that:

[T]hrough new asset management strategies, financial product innovation, and development of new institutional forms of investing (e.g. index and hedge funds), this paved the way for greater financialization of the oil industry. . . . [This has] resulted in greater . . . depth in the paper-oil market. These developments . . . have given rise to new investment assets that get their reward from price performance of oil futures and derivatives rather than the old-fashioned form of market reward through capital investment into oil exploration and extraction, and the resulting higher production.1

Thus, financial investments in the crude oil market have substantially moved from capital raising equity and debt investments for production to betting on price direction. […]

In this regard, it is interesting to note that those who have been most concerned about regulatory controls on excessive financialization of these markets are the major oil producing and exporting countries, especially at a time when they seemed to be the principal beneficiaries of record high oil prices. […]

Ali bin Ibrahim Al-Naimi, Minister of Petroleum and Mineral Resources for the Kingdom of Saudi Arabia … concluded:

I would also note that while there is little or no correlation over the past two years between global crude oil inventories and crude oil prices, there has been a strong correlation between the increasing volumes of crude oil futures trade on the NYMEX and rising prices. According to many observers and analysts, inadequate oversight, regulation and reporting of speculative investments in commodities have further exacerbated this situation.

The conclusions of Dr. Ahmad R. Jalali-Naini‘s in his April 2009 seminal report are supported by the findings within several other expert reports below. Dr. Jalali-Naini concluded, inter alia, that ―oil price movements were at times magnified by speculative pressures and incorrect expectations disseminated by certain investment banks,‖ marketing passive price directional paper investments.

I think the Saudis, if anyone, would know what is most affecting the increase in crude oil prices during a time of when the world economy is making a very slow recovery from the greatest recession in our lifetimes.

So while the indictment of a few small players in the oil futures market back in 2008 any seem like a big step, I see it as nothing more than a symbolic action. The big boys — i.e., Exxon, BP, Shell, etc. — and their accomplices on Wall Street (Goldman Sachs, anyone) …

With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.

… are probably safe from any extensive investigation into whatever price manipulation they are likely engaging. Federal civil indictments of Parnon Energy Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) S.A. are easier to obtain (though they only come three years after the fact) because those companies do not have the resources — financial and political — to fight off a DOJ investigation and prosecution. These civil actions are merely the result of the DOJ casting a small net to catch a few minnows while the big sharks continue to roam the ocean of oil in commodity exchanges in their efforts to obtain massive speculative profits and further to gouge the American consumer.

Eric Holder has expressed his “concern” about the rise in gasoline prices despite weak demand and has made vague noises about looking into the matter. To his credit, the Democratic Senator Richard Blumenthal from Connecticut in particular has been pushing the Obama DOJ hard to undertake a more serious and extensive investigation into commodity market speculation and its effect on rising oil and gas prices.

“These recent steps by DOJ to prioritize its efforts in this area as it relates to surging gas prices are important, but I believe we must go further,” the senator said in a letter Wednesday to Attorney General Eric Holder and the heads of agencies that regulate energy markets.

Blumenthal also used a Senate Judiciary Committee hearing with Holder Wednesday to express concern that the Oil and Gas Price Fraud Working Group that Holder announced in April would not be aggressive enough. […]

“With speculation in the energy markets at its highest levels on record, it is vital that prosecutors in DOJ’s Fraud Section and at the U.S. Attorneys’ offices nationwide begin immediately investigating potential ongoing commodities fraud,” adds the letter that was also sent to the heads of the Federal Trade Commission, the Commodity Futures Trading Commission, and the Federal Energy Regulatory Commission.

However, if anyone believes we are likely to see a serious investigation into the what is likely a massive price manipulation of current crude oil and gasoline prices by Big Oil and Wall Street, I suspect they will have a very long wait. As Senator Durbin reluctantly noted regarding Wall Street’s power over the actions of our Government, and in particular the Senate, “[T]hey frankly own this place.”

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