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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.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs securities.
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Reader Comments (Page 1 of 1)
8-21-2008 @ 11:28AM
william lindblad said...
So what else is new? Since all trading in general is speculative the real figure should be 100%. Nearly all data reports share the same problem in they can be manipulated to show nearly anything. As to oil and fuel in general the contracts can be made anywhere and the prices will be somewhat predicated by supply and demand and world events. Conflict will push the price higher, peace lower. When there is no potential disruptions it will revert back to supply and demand. Of course, since oil is traded in dollars the dollar euro disparity has impact. This was the catalyst for the spike to 145. The root cause for all the economic pain remains in the housing mess. One "gold rush" after the next, neither with any oversight or regulation.
Like you suggest - the "for sale" sign has been out on the government lawn for quite a while. Unlike the current housing market - they had lot's of "buyers".
While this should be held as non-partisan due to time, the current fiasco had two democratic controlled finance committees as the watchdog.
8-21-2008 @ 1:45PM
Iridium said...
What else is new? What else is new?
Excuse me but when the price of oil goes from $20 to $147 in a few years due to nothing but pure market manipulation through backdoor exemptions granted to firms that should never have them, that is a big deal.
The whole point is that the market is suppsed to be regulated by supply and demand and currently supply and demand makes up 0% of the price of a barrel of oil.
When you allow the speculation of events to drive the price that haven't even happenned yet you have a huge problem. You allow for the potential to run the market up for any reason.
Truthfully every American should take a trip to New York, walk into the Goldman Sachs office and drag every person there into the streets and beat them to death. Maybe then we will get some changes. it is clearly apparent that the US goverment has been asleep and cannot do anything.
8-21-2008 @ 9:31PM
Mr. noitall said...
I don't see anything wrong with speculation. When we buy, or sell stocks, or decide not to buy or sell, just about anything we consider an investment, then we are speculating. We didn't cry about the speculators that were helping to drive up real estate prices (profits), did we? Until they stopped speculating. Speculation is part of the "demand" side of the equation whether speculators are buying or selling. Just accept it and stop crying about it.
8-26-2008 @ 1:52PM
Beltway Greg said...
Is anyone really shocked about this? Logic should've made it apparent and I've been posting it for months. The other shoe? The sovereign wealth funds, but it's hard to regulate them when they're buying your banks, providing liquidity, and saving your country.
Beltway Greg
9-11-2008 @ 8:08PM
BIGFOOT said...
OK . Now that we know who is to blame then how come no one is talking about compensation for the public. That’s right. We all got ripped off at the pumps and we want our money back. Vitol, Goldman Sachs, Morgan Stanley and the rest of the scoundrals have an obligation to make it right again and the CFTC should be disbanded and punishment administered to the ones that covered up this massive mistake. Remember the "Oil for food" scandal and the "Contaminated oil scandal" which involve 280,000 barrels of dirty oil sold to Pakistan Pakistan? I guess we can call this one the "Vitol Swaps Scandal"