Why The Huge Spike in Oil Prices? “Peak Oil” or Wall Street Speculation?

By F. WILLIAM ENGDAHL | GLOBAL RESEARCH | MARCH 19, 2012

Since around October last year, the price of crude oil on world futures markets has exploded. Different people have different explanations. The most common one is the belief in financial markets that a war between either Israel and Iran or the USA and Iran or all three is imminent. Another camp argues that the price is rising unavoidably because the world has passed what they call “Peak Oil”—the point on an imaginary Gaussian Bell Curve (see graph above) at which half of all world known oil reserves have been depleted and the remaining oil will decline in quantity at an accelerating pace with rising price.

 Both the war danger and peak oil explanations are off base. As in the astronomic price run-up in the Summer of 2008 when oil in futures markets briefly hit $147 a barrel, oil today is rising because of the speculative pressure on oil futures markets from hedge funds and major banks such as Citigroup, JP Morgan Chase and most notably, Goldman Sachs, the bank always present when there are big bucks to be won for little effort betting on a sure thing. They’re getting a generous assist from the US Government agency entrusted with regulating financial derivatives, the Commodity Futures Trading Corporation (CFTC).

Source: oilnergy.com

Since the beginning of October 2011, some six months ago, the price of Brent Crude Oil Futures on the ICE Futures exchange has risen from just below $100 a barrel to over $126 per barrel, a rise of more than 25%. Back in 2009 oil was $30.

 Yet demand for crude oil worldwide is not rising, but rather is declining in the same period. The International Energy Agency (IEA) reports that the world oil supply rose by 1.3 million barrels a day in the last three months of 2011 while world demand increased by just over half that during that same time period.Gasoline usage is down in the US by 8%, Europe by 22% and even in China. Recession across much of the European Union, a deepening recession/depression in the United States and slowdown in Japan have reduced global oil demand while new discoveries are coming online daily and countries like Iraq are increasing supply after years of war. A brief spike in China’s oil purchases in January and February had to do with a decision last December to build their Strategic Petroleum Reserve and is expected to return to more normal import levels by the end of this month.

 Why then the huge spike in oil prices?

 Playing with ‘paper oil’

 A brief look at how today’s “paper oil” markets function is useful. Since Goldman Sachs bought J. Aron & Co., a savvy commodities trader in the 1980’s, trading in crude oil has gone from a domain of buyers and sellers of spot or physical oil to a market where unregulated speculation in oil futures, bets on a price of a given crude on a specific future date, usually in 30 or 60 or 90 days, and not actual supply-demand of physical oil determine daily oil prices.

 In recent years, a Wall Street-friendly (and Wall Street financed) US Congress has passed several laws to help the banks that were interested in trading oil futures, among them one that allowed the bankrupt Enron to get away with a financial ponzi scheme worth billions in 2001 before it went bankrupt.

 The Commodity Futures Modernization Act of 2000 (CFMA) was drafted by the man who today is President Obama’s Treasury Secretary, Tim Geithner. The CFMA in effect gave over-the-counter (between financial institutions) derivatives trading in energy futures free reign, absent any US Government supervision, as a result of the financially influential lobbying pressure of the Wall Street banks. Oil and other energy products were exempt under what came to be called the “Enron Loophole.”

 In 2008 during a popular outrage against Wall Street banks for causing the financial crisis, Congress finally passed a law over the veto of President George Bush to “close the Enron Loophole.” And as of January 2011, under the Dodd-Frank Wall Street Reform act, the CFTC was given authority to impose position caps on oil traders beginning in January 2011.

 Curiously, these limits have not yet been implemented by the CFTC. In a recent interview Senator Bernie Sanders of Vermont stated that the CFTC doesn’t “have the will” to enact these limits and “needs to obey the law.” He adds, “What we need to do is…limit the amount of oil any one company can control on the oil futures market. The function of these speculators is not to use oil but to make profits from speculation, drive prices up and sell.”1 While he has made noises of trying to close the loopholes, CFTC Chairman Gary Gensler has yet to do so. Notably,Gensler is a former executive of, you guessed, Goldman Sachs. The enforcement by the CFTC remains non-existent.

 The role of key banks along with oil majors such as BP in manipulating a new oil price bubble since last Autumn, one detached from the physical reality of supply-demand calculations of real oil barrels, is being noted by a number of sources.

 A ‘gambling casino…’

 Current estimates are that speculators, that is futures traders such as banks and hedge funds who have no intent of taking physical delivery but only of turning a paper profit, today control some 80 percent of the energy futures market, up from 30 percent a decade ago. CFTC Chair Gary Gensler, perhaps to maintain a patina of credibility while his agency ignored the legal mandate of Congress, declared last year in reference to oil markets that “huge inflows of speculative money create a self-fulfilling prophecy that drives up commodity prices.” 2 In early March, Kuwaiti Oil Minister Minister Hani Hussein said in an interview broadcast on state television, “Under the supply and demand theory, oil prices today are not justified.”3

 Michael Greenberger, professor at the University of Maryland School of Law and a former CFTC regulator who has tried to draw public attention to the consequences of the US Government’s decisions to allow unbridled speculation and manipulation of energy prices by big banks and funds, recently noted, “There are 50 studies showing that speculation adds an incredible premium to the price of oil, but somehow that hasn’t seeped into the conventional wisdom,” Greenberger said. “Once you have the market dominated by speculators, what you really have is a gambling casino.” 4

 The result of a permissive US Government regulation of oil markets has created the ideal conditions whereby a handful of strategic banks and financial institutions, interestingly the same ones dominating world trade in oil derivatives and the same ones who own the shares of the major oil trading exchange in London, ICE Futures, are able to manipulate huge short-term swings in the price we pay for oil or gasoline or countless other petroleum-based products.

 We are in the midst of one of those swings now, one made worse by the Israeli saber-rattling rhetoric over Iran’s nuclear program. Let me go on record stating categorically my firm conviction that Israel will not engage in a direct war against Iran nor will Washington. But the effect of the war rhetoric is to create the ideal backdrop for a massive speculative spike in oil. Some analysts speak of oil at $150 by summer.

 Hillary Clinton just insured that the oil price will continue to ride high for months on fears of a war with Iran by delivering a new ultimatum to Iran on the nuclear issue in talks with Russian Foreign Minister Lavrov, “by year’s end or else…” 5

 Curiously, one of the real drivers of the current oil price bubble is the Obama Administration’s economic sanctions recently imposed on oil transactions of the Central Bank of Iran. By pressuring Japan, South Korea and the EU not to import Iranian oil or face punitive actions, Washington has reportedly forced a huge drop in oil supply from Iran to the world market in recent weeks, giving a turbo boost to the Wall Street derivatives play on oil. In a recent OpEd in the London Financial Times, Ian Bremmer and David Gordon of the Eurasia Group wrote, “… removing too much Iranian oil from the world’s energy supply could cause an oil price spike that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time, sanctions have the potential to be ‘too successful,’ hurting the sanctioners as much as the sanctioned.”

 Iran is shipping 300,000 to 400,000 a barrels a day less than its usual 2.5 million barrels a day, according to Bloomberg. Last week, the US Energy Information Administration said in a report that much of that Iranian oil isn’t being exported because insurers won’t issue policies for the shipments.6

 The issue of unbridled and unregulated oil derivatives speculation by a handful of big banks is not a new issue. A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

 The report pointed out that the Commodity Futures Trading Trading Commission had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.” Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.”7

 Where is the CFTC now that we need such limits? As Senator Sanders correctly noted, the CFTC appears to ignore the law to the benefit of Goldman Sachs and Wall Street friends who dominate the trade in oil futures.

 The moment that it becomes clear that the Obama Administration has acted to prevent any war with Iran by opening various diplomatic back-channels and that Netanyahu is merely trying to use the war threats to enhance his tactical position to horse trade with an Obama Administration he despises, the price of oil is poised to drop like a stone within days. Until then, the key oil derivatives insiders are laughing all the way to the bank. The effect of the soaring oil prices on fragile world economic growth, especially in countries like China is very negative as well.

Notes:

1 Morgan Korn, Oil Speculators Must Be Stopped and the CFTC “Needs to Obey the Law”: Sen. Bernie Sanders, Daily Ticker, March 7, 2012, accessed in
http://finance.yahoo.com/blogs/daily-ticker/oil-speculators-must-stopped-ctfc-needs-obey-law-182903332.html

2 Ibid.

3 UpstreamOnline, Kuwait’s oil minister believes current world oil prices are not justified, adding that the Gulf state’s current production rate will not affect its level of strategic reserves, 12 March 2012, accessed in
http://www.upstreamonline.com/live/article1236944.ece

4 Peter S. Goodman, Behind Gas Price Increases, Obama’s Failure To Crack Down On Speculators, The Huffington Post, March 15, 2012, accessed in
http://www.huffingtonpost.com/peter-s-goodman/gas-price-increase_b_1346035.html

5 Tom Parfitt, US ‘tells Russia to warn Iran of last chance’ , The Telegraph, 14 March 2012, accessed in
http://www.telegraph.co.uk/news/worldnews/middleeast/iran/9142688/US-tells-Russia-to-warn-Iran-of-last-chance.html

6 Steve Levine, Obama administration brushes off oil price impact of Iran sanctions, Foreign Policy, March 8, 2012, accessed in
http://oilandglory.foreignpolicy.com/posts/2012/03/08/obama_administration_brushes_off_oil_price_impact_of_iran_sanctions

7 F. William Engdahl, ‘Perhaps 60% of today’s oil price is pure speculation’, Global Research, May 2, 2008, accessed in
http://www.globalresearch.ca/index.php?context=va&aid=8878.

U.S. wants to ‘close down the Central Bank of Iran’ over nuclear concerns

AFP
January 13, 2012

The latest round of American sanctions are aimed at shutting down Iran’s central bank, a senior U.S. official said Thursday, spelling out that intention directly for the first time.

“We do need to close down the Central Bank of Iran (CBI),” the official told reporters on condition of anonymity, while adding that the United States is moving quickly to implement the sanctions, signed into law last month.

The sanctions, broadly aimed at forcing Tehran to shift course on its nuclear program, targeted Iran’s crucial oil sector and required foreign firms to make a choice between doing business with Iran or the United States.

Foreign central banks that deal with the Iranian central bank on oil transactions could also face similar restrictions under the new law, which has sparked fears of damage to U.S. ties with nations like Russia and China.

“If a correspondent bank of a U.S. bank wants to do business with us and they’re doing business with CBI or other designated Iranian banks… then they’re going to get in trouble with us,” the US official said.

The measures were contained in a mammoth $662-billion defence bill, which President Barak Obama signed on December 31 at a time of rising tension with Tehran, which has threatened to block the Strait of Hormuz — through which more than a third of the world’s tanker-borne oil passes.

The United States has warned it will “not tolerate” such an interruption.

There are fears that increased sanctions on Iran’s central bank could force the global price of oil to suddenly soar, and actually give Tehran a financial windfall on its existing oil sales.

Rising oil prices could also crimp the fragile economic recovery in the United States and inflict pain on American voters in gas stations — at a time when Obama is running for reelection next year.

What’s happening in the Middle East?

by Luis R. Miranda
The Real Agenda
February 24, 2011

If the crisis in the Middle East and North Africa blocks oil production in Libya and Algeria, oil prices could explode and reach $ 220 per barrel. According to a new report from Nomura-Tokyo, the simultaneous interruption will reduce the capacity of OPEC to produce 2.1 million barrels a day. During the Gulf War in 1990-1991, oil prices jumped 70% in seven months, when the capacity was reduced to only 1.8 million barrels a day.

Former Secretary of State, Henry Kissinger.

Porter Stansberry, founder of Stansberry & Associates Investment Research, reached the same conclusion. The agreement is the fact that by the end of 2012, the price of oil, which will cross the $ 200 a barrel, will make the dollar collapse as a reserve currency. In addition, there will be no supply of oil from the Middle East. What this means is that everything valued in dollars will be profoundly affected, including personal, business and government debt. Analysts conclude that even Saudi Arabia, which aims to supply the market with more oil, cannot calm the crisis caused by the globalists who control the Middle East, Europe, Asia and America.

Several media reports indicate that Muammar Qaddafi, Libya’s current dictator, intends to sabotage its oil production, which would accelerate the crisis. According to Lindsey Williams, a confidant of two oil producing company directors like Ken Fromm of Atlantic Richfield, the globalists who control the oil supply will violate an agreement made with OPEC in 1977, signed by former Secretary of State Henry Kissinger, where the U.S. and other Western nations pledged not to use its vast reserves and instead buy oil produced in the Arab world. In return, the Arabs would use some of the money received to buy debt issued by the United States. This money has been used to finance the debt-based economic system that America has used for decades. In late 2012, “the agreement will be broken by the globalists,” which will end OPEC’s supply to the Western world. This will force companies to exploit massive reserves in the United States.

Williams provided a detailed account four months ago, that the Middle East would explode in chaos, which is true today in Egypt, Libya, Jordan, Pakistan, and others. The success of his comments are a result of information from first-hand sources, with whom he shared time for many years and who gave him the information. It is precisely these sources who also planned the execution of many of the marches and protests in the Middle East to destabilize the Arab world and unleash their plan that includes the violation of the agreement signed in the seventies. Once the globalists violate the agreement made with the Arabs, they will not have the dollars to purchase U.S. debt, which will further weaken the current reserve currency. Furthermore, any debt bought by Arabs and others like China, will be devalued and lost.

In 1971, Ken Fromm told Lindsey Williams that the producers would not open American reserves until the price of oil reached $ 200 per barrel. This price will be achieved according to various sources in 2012. The lack of oil will bring serious consequences, for the U.S. and the entire planet. Meanwhile, Russia, the largest oil producer of oil today, and China, have signed a deal to give the chinese all the oil and natural gas to develop its economy and become the world’s number one, above the United States.

According to Williams, the globalists will begin exploiting the huge reserves in U.S. territory, which have remained closed as a condition of the agreement signed between Kissinger and OPEC in 1977. Currently, the U.S. Geological Survey (USGS) says, there is a massive oil well right below the states of North Dakota, South Dakota and Montana, with oil reserves of about 503 billion barrels. This oil well runs through the northern border to Canada. The existence of this and other oil wells with oil of the “light sweet” type, has been there forever and the globalists have known it for decades. What is relevant about this detail is that “light sweet” oil requires little or no industrial processing, which means that would be available for use almost immediately.

This oil could be produced at a cost of just $ 16 dollars per barrel, a price that certainly the globalists will not offer to distribution centers. Instead, they will keep the price at $ 200 or more, so that consumers have to pay 7 or 8 dollars at their favorite gas stations. According to Williams, there is enough oil in this well to meet U.S. demand until 2041. To that we must add the other oil reserves in North America hidden beneath the Rocky Mountains, which is considered the largest of all wells available in the world that has not been exploited. According to studies, the available reserves in the Rocky Mountains reach 2 trillion barrels. James Bartis, one of the researchers who participated in the study, said the United States has more oil than any other country in the world, even more than several producers put together. Another massive well is found in Gull Island Alaska.

What will be the results of this massive shift in oil supply? For one, none, because the globalists that cause economic crises, wars and social unrest would still be in power and perhaps more powerful than ever. Analysts believe that a new world will emerge from the disaster that the globalists are causing in the East. In fact, one of the biggest changes will be the imposition of a new reserve currency, given the fact the dollar will not occupy that position anymore. Lindsey Williams says that the people responsible for the actual destruction of America and Western Europe will eventually rebuild these two regions of the planet, but will also have even more power over them.

Intelligence analyst Wayne Madsen, who worked for the National Security Agency (NSA) and is now an investigative reporter in Washington, DC, also agrees with Williams and Tarpley. According to Madsen, the same globalists who caused the conflict in North Africa are also responsible for the protests in Bahrain, Greece, Turkey, Iran and Pakistan. He also agrees with the fact that all these presidents and dictators have been carefully selected and placed around the world to carry out the plans of the globalists, who as payment, now get themselves overthrown. Madsen believes that Mummar Qaddafi will probably end up running out of Libya to any of the dictatorships that he has protected in the region in a matter of days, such as Zimbabwe, Gambia, or even South Africa. In Yemen, Madsen said, the independent movements will regain power from the dictators who have oppressed them for so long.

Historians such as G. Webster Tarpley has agreed with this description in several media appearances in the U.S. and Europe. Tarpley exemplifies actions such as Barack Obama’s speech Wednesday night where he said that his national security team was in the process of negotiating with allies in the world plans to intervene in Libya with the intention to appease any actions considered extreme by the U.S. and its allies. In his speech Obama used demagogic comments to support his points, saying the United States supported the people in the Middle East who are being abused by dictators. Obama however, does not do what he preaches in his own backyard. “The rights to free speech and assembly are inviolable,” said Obama, who allows oppression of American citizens when they express their discontent with the economy or the way Obama himself directs the destiny of the country.

While Obama clearly understands that the conflict in the Middle East is a direct consequence of the actions of his country and the Anglo-Saxon Empire that controls it, he has spared no effort to insist that no Western power was responsible for that conflict. He takes advantage of the fact that many people do not understand the context, history or source of the misery for thousands of Arabs who have been oppressed for many years. What the vast majority of these people do not realize is that they are being subject of a new deception, because those who claim to be helping them, are really giving them more of the same. It remains to be seen if the people allow this to happen or take onto the streets to demand accountability, but for real, without being duped, once again, by those who have kept them inside the current neo-feudal system for decades.


Tokyo-based Nomura: Oil prices may hit $220 a barrel

By Matt Egan
Fox Business
February 23, 2011

If the turmoil paralyzing parts of the Middle East and North Africa brings oil production in Libya and Algeria to a standstill, it could cause crude oil to explode to $220 a barrel, derailing the global economic recovery.

According to a new report from Tokyo-based Nomura, a simultaneous production halt from embattled Libya and neighboring Algeria would reduce OPEC spare capacity to 2.1 million barrels a day and may cause crude to spike from about $97 a barrel today to $220 a barrel.

“The closest comparison is the 1990-1991 Gulf War,” the Nomura analysts, led by Michael Lo, wrote, saying crude prices leaped 70% in seven months when OPEC’s spare capacity was cut to just 1.8 million barrels a day during that conflict with oil-rich Iraq.

While the $220 figure may sound high, Nomura said it could be an underestimate as speculative oil traders who were not around during the Gulf War may exaggerate the surge during an oil production halt.

The turmoil in Algeria hasn’t gotten nearly as much attention, but that government is also believed to be very vulnerable and recent protests have led the government there to lift its state of emergency.

The report comes as Wall Street has grown increasingly fearful the violence slamming Libya, Africa’s third-largest oil producer, will eat into the global economic recovery.

Even though the global economy has strengthened considerably in recent months, it’s clear $220 oil prices would seriously hurt growth, putting a huge burden on cash-strapped consumers and businesses, especially transportation companies like shipping giant FedEx (FDX: 89.25, 0.00, 0.00%), airliner JetBlue (JBLU: 5.70, 0.00, 0.00%) and cruise operator Carnival (CCL: 42.06, 0.00, 0.00%).

Crude’s expiring March contract spiked 8.5% — its biggest one-day gain since April 2009 — to a 2 1/2-year high of $93.57 on Tuesday in response to the turmoil in Libya. The surge in oil prices sent the Dow Jones Industrial Average tumbling 178 points, its steepest decline since November.

With no resolution in sight, crude continued its gains on Wednesday, with the commodity’s April contract jumping $2.16 a barrel, or 2.30%, to $97.58. Brent crude continues to vault ahead of crude, surging another $3.92 a barrel, or 3.71%, to $109.70.

According to Bloomberg data, Libya pumped 1.59 million barrels of crude a day last month, while Algeria pumped 1.25 million barrels a day.

The markets have been pricing in the possibility the crisis in Libya will break out into an all-out civil war as longtime Libyan leader Muammar al-Qaddafi has refused to step down. In a televised speech on Tuesday, he said, “I will fight to the last drop of my blood.”

Citing a source close to the al-Qaddafi regime, Time Magazine reported late Tuesday the leader has ordered security services to start sabotaging oil facilities. The forces plan to blow up several oil pipelines, cutting off flow to Mediterranean ports, the report said.

According to Italian authorities, the death toll during the political unrest in Libya may have jumped to about 1,000.

Oil on its way to $200 a barrel

  • Crude climbed up to $110 today due to what experts say is the effects of Libyan and Middle East unrest.
  • Oil insider Lindsey Williams says it´s just the beginning. “Unrest and oil prices will completely collapse U.S. Dollar in 2012.”
  • Oil companies will open massive U.S. reserves to cope with lack of oil for local consumption.

Reuters
February 23, 2011

Oil futures rallied above $110 a barrel on Wednesday, posting the biggest three-day percentage gain in a year, as the escalating violence in Libya could further reduce its production.

Between 300,000 and 400,000 barrels per day of Libyan output — up to 25 percent — has been shut down, according to Reuters calculations, marking the first cut in oil supplies related to the recent wave of anti-government unrest in North Africa and the Middle East.

After Libyan leader Muammar Gaddafi vowed in a defiant speech on Tuesday that he would not step down, promising severe punishment to his detractors, analysts fear that long-lasting supply disruptions or even permanent damage lies ahead for the OPEC member’s oil industry.

Traders were intently watching what top OPEC exporter Saudi Arabia will do, even as its oil minister has reiterated assurances the kingdom and other OPEC members would be ready to act should a supply shortfall develop.

“I don’t think Libya alone will take us to $150 a barrel, but, if unrest spreads in the Gulf countries, we could easily get there. That is why it is imperative the Saudis release some extra barrels into the market now to calm the situation, rather than simply trying to talk the price down,” said Edward Meir, an analyst at MF Global in New York.

In London, ICE Brent crude for April delivery gained $4.01, or 3.8 percent, at $109.79 a barrel. Earlier, it touched a session high of $110.35, the highest since September 2, 2008, when prices hit $110.45.

In three days, the Brent contract has surged nearly $8, or 7.8 percent, the biggest three-day percentage advance since February 2010.

In New York, the new front-month, April crude rose $2.48, or 2.6 percent, to $97.90 a barrel. It earlier reached $98.07, the highest intraday price since October 2, 2008, when prices hit $100.37.

Since resuming trading on Tuesday, following a long holiday weekend, U.S. crude has advanced nearly $12, or nearly 14 percent, the biggest two-day percentage gain since January 2009.

Brent’s premium against U.S. crude widened to as much as $12.84, after posting $10.36 at the close on Tuesday.

Traders were gearing up for U.S. weekly inventory data, the first of which will be released by the industry group American Petroleum Institute later Wednesday at 4:30 p.m. EST.

A Reuters poll forecast that U.S. crude stockpiles rose 1.3 million barrels last week, while distillate inventories fell 1.4 million barrels and gasoline supplies rose 400,000 barrels.