Upset about paying $3.80 a gallon for gasoline? Hank Paulson, former Goldman Sachs Group (NYSE: GS) CEO, argued that it was all supply and demand so quit your bellyaching. I thought speculation was playing a big part -- traders who bought oil and sold the dollar to drive up the price. Indeed, a few months agao I found a source who thinks 60% of the volume was from speculators.
Seems even that was too low an estimate. The Washington Post reported Wednesday that the Commodities Futures Trading Commission (CFTC) has analyzed the books of oil traders and calculated that 81% of oil trading volume was conducted by speculators.
Guess who broke open the opportunity for oil speculators to trade oil in a loosely regulated fashion? Goldman. The Post reports that In 1991, its J. Aron unit argued that "it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms."
The CFTC granted this request. More exemptions soon followed, including one to Enron that allowed it to trade huge positions for speculative purposes. The Post also reports that the biggest firm speculating on oil -- which bears the most responsibility for your high gasoline prices -- is a Swiss trader called Vitol, which at one point in July, "held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange." While the CFTC may change the rules to stop such speculation, that's not a long-term concern for Goldman and Vital.
They're investing in an unregulated exchange in Dubai that trades U.S. oil contracts. So when Goldman predicts oil is going to hit $200 a barrel and Hank Paulson tells you oil prices are determined by supply and demand -- hold onto your wallet. We have the best government Goldman (and the Swiss) can buy.
It is possible that Paulson was not aware of how much speculation drives oil prices when he blamed supply and demand. And I would not be shocked to learn that the possibility is close to zero.
If you ever thought that your vote mattered, think about how much more theirs does.