The scam behind the rise in oil, food prices

Danny Schechter, at Al Jazeera, interviews Phil about excessive speculation in the oil markets.

Speculators and free market believers may argue that they are not to blame, they are simply trying to make money by following the trends and not holding onto cash, as the Fed is busily debasing the U.S. Dollar. There is some merit in that argument, but that doesn’t solve the problem.  

Addressing the problem begins with identifying the underlying causes – what is enabling and encouraging so much speculation? What kind of regulation might be reasonable (should this game have rules because people’s lives are being turned upside down)?  Who are the biggest speculators? I submit that the problem originates with Federal govt’s failure to govern itself and promote a healthy economy, the Federal Reserve’s policy of Quantitative Easing, and the lack of intelligent regulation. – Ilene 

The scam behind the rise in oil, food prices 

Speculation on the futures market, rather than supply and demand, is driving up costs, analysts say.

The US uses 18 million barrels of oil each day, so price rises have major impacts on consumers [GALLO/GETTY]

By Danny Schechter, Al Jazeera

The global economy and its recovery, and the living standards of millions of plain folks, are now at risk from the sudden rise in oil and commodity prices.

Gas at the pump is up, and going higher. Food prices are following.

The consequences are catastrophic for the global poor as their costs go up while their income doesn’t. It’s menacing American workers too, who in large part have not seen a meaningful raise since the days of Reagan (keeping it this way is clearly behind the current flurry of attacks on unions).

Already, unrest in the Middle East and many African countries is being blamed for these dramatic increases. It seems as if this threat to global stability is being largely ignored in our media, one that treats the oil business as just another mystical world of free market trading.

Why is it happening? Why all the volatility? Is oil getting scarcer, leading to price increases? Is the cost of food, similarly, a reflection of naturally increasing commodity prices?

Oil speculating

While it’s true that natural disasters and droughts play some role in this unchecked price inflation, it also seems apparent that something else is attracting increasing attention, even if most of our media fails to explore what is a political time bomb, while most political leaders shrug their shoulder and ignore it.

President Obama recently said there is nothing he can do about the hike in oil and food prices.

Critics say the problem is that government and media outlets alike refuse to recognise what’s really going on: unchecked speculation!

Not everyone buys into this suspicion. In fact, it is one of more intense subjects of debate in economics.

Princeton University economist Paul Krugman pooh-poohs the impact of speculation counter-posing the traditional argument that oil prices are set by supply and demand.

The Economist agrees, summing up its views with a pithy phrase, "Speculation does not drive the oil price. Driving does."

Others, like oil industry analyst Michael Klare of Hampshire College in the US, sees demand outdistancing supply:

Usually you hear this debate in scholarly circles or read it in political tracts where orthodox views collide with more alarmist projections about the oil supply "peaking".

But officials in the Third World don’t see the subject as academic. Reserve Bank of India Governor Duvvuri Subbarao charges that: "Speculative movements in commodity derivative markets are also causing volatility in prices".

The World Bank has held meetings on the issue, because it is seen as a matter of "utmost urgency".

"The price of food is a matter of life and death for the very poorest people in the world," said Tom Arnold, CEO of Concern Worldwide, the international humanitarian agency, ahead of his participation at The Open Forum on Food at World Bank headquarters.

"With many families spending up to 80 per cent of their income on basic foods to survive, even the slightest increase in price can have devastating effects and become a crises for the poorest," he said.

Journalist Josh Clark argues on the website "How Stuff Works" that much of the oil speculation is rooted in the financial crisis:

Whistleblowers on oil speculation

The debate within the industry is more subdued, perhaps to avoid a public fight between suppliers and distributors who don’t want to rock the boat.

But some officials like Dan Gilligan, president of the Petroleum Marketers Association, representing 8,000 retail and wholesale suppliers has spoken out. 

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities," he argues. "Not by companies that need oil, not by the airlines, not by the oil companies. But by investors who profit money from their speculative positions."

Now, a prominent and popular market analyst is throwing caution to the wind by blowing the whistle on speculators.

Finance expert Phil Davis runs a website and widely read newsletter to monitor stocks and options trades. He’s a professional’s professional, whose grandfather taught him to buy stocks when he was just ten years old.

His website is Phil’s Stock World, and stocks are his world. He’s subtitled the site: "High Finance for Real People."

He is usually a sober and calm analyst, not known as maverick or dissenter.

When I met Phil the other night, he was on fire, enraged by what he believes is the scam of the century that no one wants to talk about, because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence.

He studies the oil/food issue carefully and has concluded:

Phil is just getting started, as he delves into the intricacies of the NYMEX market that handles these trades:

These contracts for oil outnumber their actual delivery, a sign of speculation and market manipulation, as oil companies win government authorisations for wells but then don’t open them for exploration or exploitation.

It’s all a game of manipulating oil supply to keep prices up. And no one seems to be regulating it.

Danger met with silence

What Phil sees is a giant but intricate game of market manipulation and rigging by a cartel – not just an industry –that actually has loaded tankers criss-crossing the oceans but only landing when the price is right.

He asks: "Who is buying 287,494 contracts (1,000 barrels per contract) for May delivery that can’t possibly be delivered for $2.49 more than they were priced the day before? These are the kind of questions that you would think regulators would be asking – if we had any."

The TV news magazine 60 minutes spoke with Dan Gilligan who noted that investors don’t actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

He says they make their fortunes "on the volatility that exists in the market. They make it going up and down."

Payam Sharifi, at the University of Missouri-Kansas City, notes that even as the rise in oil prices threatens the world economy, there is almost total silence on the danger:

Danny Schechter made the film Plunder The Crime of Our Time (Plunderthecrimeofourtime.com) on the financial crisis as a crime story. He also wrote an introduction to the recent reissue of a classic two-volume expose of John D. Rockefeller’s The Standard Oil Company (Cosimo Books), one of the top ten works top works of investigative reporting in America. 

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.