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Late Night Speculation and Outrage

Posted: May 27, 2011 | Author: | Filed under: investment banking, We are so F'd | Tags: , |17 Comments

There’s another interesting WikiLeak that’s come to light about high gas prices. It seems that President Bush asked the Saudis to pump extra oil to help relieve market pressure on prices in 2007 and 2008.  The Saudis suggested that Bush tackle the problem by reigning in Wall Street speculation.

When oil prices hit a record $147 a barrel in July 2008, the Bush administration leaned on Saudi Arabia to pump more crude in hopes that a flood of new crude would drive the price down. The Saudis complied, but not before warning that oil already was plentiful and that Wall Street speculation, not a shortage of oil, was driving up prices.

Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,

“Saudi Arabia can’t just put crude out on the market,” the cable quotes Naimi as saying. Instead, Naimi suggested, “speculators bore significant responsibility for the sharp increase in oil prices in the last few years,” according to the cable.

What role Wall Street investors play in the high cost of oil is a hotly debated topic in Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.

The Obama administration, the Bush administration before it and Congress have been slow to take steps to rein in speculators. On Tuesday, the Commodity Futures Trading Commission, a U.S. regulatory agency, charged a group of financial firms with manipulating the price of oil in 2008. But the commission hasn’t enacted a proposal to limit the percentage of oil contracts a financial company can hold, while Congress remains focused primarily on big oil companies, threatening in hearings last week to eliminate their tax breaks because of the $38 billion in first-quarter profits the top six U.S. companies earned.

The Saudis, however, have struck a steady theme for years that something should be done to curb the influence of banks and hedge funds that are speculating on the price of oil, according to diplomatic cables made available to McClatchy by the WikiLeaks website.

The Saudis evidently repeatedly warned both the Bush and Obama administration about the roll of Wall Street speculators in the price of oil.

Matt Taibi has also written some about the WikiLeaks information.

The Wiki documents show that the Saudis had long ago concluded that this increased investor flow was a threat to disrupt the markets. An embassy cable from 2007 recounted a meeting U.S. officials had with Yasser Mufti, an Aramco planner. “The Saudi analysts indicated a link between higher oil prices and the influx of investor funds into the oil markets,” it read.

The cables also show that the Saudis urged the Americans to enact reforms to rein in Wall Street, calling for speculative limits and other changes. It also showed that some Saudi officials believed that speculation added as much as $40 to the oil price during the height of the bubble.

All of this is significant because both the Bush administration and the Obama administration have denied this narrative to various degrees. The CFTC only recently admitted that speculation played a role in the 2008 mess, having originally (and stubbornly) blamed supply and demand issues. Subsequent analyses have shown that the Saudi position, that worldwide demand for oil never increased nearly enough to account for the gigantic 2008 price spike, was almost certainly correct.

You have to wonder if the current situation also reflects the lack of will by the last two administrations to reign in Wall Street excess.  Hopefully, this information will get some play in the MSM but I’m not holding my breath.

17 Comments on “Late Night Speculation and Outrage”

  1. Woman Voter's avatar Woman Voter says:
    May 27, 2011 at 9:18 pm

    Could these Wall Street speculators manipulate the gas pries at the peak election cycles?

  2. bostonboomer's avatar bostonboomer says:
    May 27, 2011 at 9:24 pm

    And now corporations can give directly to candidates. Lovely.

    http://www.bloomberg.com/news/2011-05-27/ban-on-corporate-donations-to-candidates-tossed-by-judge-in-clinton-case.html

    • Woman Voter's avatar Woman Voter says:
      May 27, 2011 at 9:31 pm

      Change ‘We The People’ to ‘We The Corporate Elite’.

    • Sophie's avatar Sophie says:
      May 27, 2011 at 9:58 pm

      From the case file:

      This case involves an alleged scheme of recruiting donors and reimbursing their contributions to Hillary Clinton’s2006 and 2008 Senate and Presidential Campaigns.
      …
      The Government alleges that Mr. Danielczyk, as Chairman of Galen Capital Group, LLC, and Galen Capital Corporation (together, “Galen”) and Mr. Biagi, as an executive at Galen, subverted federal campaign contribution limits by reimbursing their employees’ costs of attending two fundraisers Mr. Danielczyk co-hosted for the two campaigns.

  3. madamab's avatar madamab says:
    May 27, 2011 at 9:53 pm

    The price of gas was up to $4.29 a week or so ago…now it’s down to $4.05.

    There is no way that is happening because of supply and demand. I may have only had one econ class, but it seems pretty obvious to me! The stock market is the only thing that goes up and down that fast. The speculator explanation makes sense to me!

  4. minkoffminx's avatar Minkoff Minx says:
    May 27, 2011 at 10:41 pm

    Dak, I am so glad you highlighted this latest Wikileak. Thank you.

  5. Joseph Cannon's avatar Joseph Cannon says:
    May 28, 2011 at 12:37 pm

    Hey, Kat…

    I published a snippet from your story on my own blog, as well as a quote from Taibbi. The post got a very heated response from a retired AMOCO executive, who calls Taibbi a “third-rate hack.”

    Thought maybe you’d want to check it out, and maybe tell us all where we’re wrong.

    • dakinikat's avatar dakinikat says:
      May 28, 2011 at 2:18 pm

      I’ll go post the link over there, but he’s kind’ve gone off on a wild hair. The CFTC put out a study in August 2009 that basically said it was the role of speculators.

      Here’s info on that:

      A new academic study contends that speculation by financial players like banks, hedge funds and index funds was behind the steep rise in oil prices last year and says that the Commodity Futures Trading Commission used models that were “not adequate” when it argued that speculation was not a major factor in the oil price spike.

      The authors of the study, Kenneth Medlock and Amy Myers Jaffe, from the Baker Institute for Public Policy at Rice University, write that the commission looked at models that measured volatility just in a couple of months to base their conclusion that financial speculation was not behind oil’s meteoric rise last year to $147 a barrel, from $80.

      The authors argued that the commission should have been looking at the rise in the number of speculators in the market, most which were betting on higher oil prices, in order to gauge the effects that speculation was having.

    • dakinikat's avatar dakinikat says:
      May 28, 2011 at 2:20 pm

      oh, and Taibbi is probably a second rate hack …

  6. Dario's avatar Dario says:
    May 28, 2011 at 1:02 pm

    President Clinton used the oil reserve to stop Wall Street speculators.

    President Clinton used the reserves at least twice that I remember. Speculators won’t run amok if they know the president will use means at his disposal to stop the speculation. Losing a bad bet is not what speculators do. As soon as Bush got in power, Wall Street played the game and nobody stopped them. Junior junior is not different than his mentor.

    • bostonboomer's avatar bostonboomer says:
      May 28, 2011 at 3:57 pm

      Even George W. Bush did it once! But not Obama.

      • Rikke's avatar Sima says:
        June 1, 2011 at 2:50 am

        Heh, coming in late on this, but would Obama even know to ask about it? I really doubt it. So if his econ people keep mum, he’ll never be the wiser.

        Not that I really think he gives a crap about us little people.

  7. fiscalliberal's avatar fiscalliberal says:
    May 28, 2011 at 4:25 pm

    There is a new report put out by the Democratic Staff at

    Click to access COOGR%20Democratic%20Oil%20Report%2005-23-11.pdf

    It is titled Real Help for Ameican Consumers: Who’ profiting at the Pump

    27 pages documenting the speculation scenario and what is being done by CFTC. The Republicans are blocking regulation by delaying implementation and underfunding regulators.

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