Time To Close the Enron Loop Hole

[Boom_70]

Carl Levin has a bill before congress to close Enron loophole. In simple terms this "loophole" was part "Commodity Modernization act" which was signed into law in 2000.

It was added at behest of Enron and other energy traders to allow them to trade in energy futures in unregulatated enviroment.

Since law has gone into effect, price of oil has gone from $25 per barrel to $120.

This loophole is a major factor in why we are paying almost $4 per gallon at the pump. It's time to put some controls back in energy.

I've written my reps and I urge you all to do the same.

Here is link to site with further background.

http://www.closetheenronloophole.com/

 

[Football_Bat]

I find it hard to believe energy companies would be the ones bidding up the raw materials (in this case, crude oil). That's right off the top of their overhead.

Instead I see them gaming the system Enron-syle, via longer-than-expected changeovers to summer blend, or a timely refinery accident, to minimize supply of finished product — and thus maximize profits.

There are other nefarious plots afoot to raise crude prices.

 

[Boom_70]

I find it hard to believe energy companies would be the ones bidding up the raw materials (in this case, crude oil). That's right off the top of their overhead.

Instead I see them gaming the system Enron-syle, via longer-than-expected changeovers to summer blend, or a timely refinery accident, to minimize supply of finished product — and thus maximize profits.

There are other nefarious plots afoot to raise crude prices.

Not energy companies - energy traders and hedge funds are pushing up the prices on futures market.

 

[Boom_70]

I am bumping this up because I believe it's such an important issue when you look for reasons for high gas prices.

Article in Times today suggests that price of oil has been manipulated in futures market by at least 25- 40 %

http://www.nytimes.com/2008/05/03/washington/03cong.html?_r=1&scp=9&sq=energy&st=nyt&oref=slogin

It's time to close the loophole.

 

[The Big Ragu]

Derivatives have nothing to do with what is happening to gas prices. I challenge anyone to explain how derivatives trading has ANY impact on a commodity that is simply being influenced by supply (not enough being pumped) and demand (a great deal of it and increasing by the day). Lay it out, please. You can't.

This is so stupid. Even the fact that it has been labeled a "loophole" is proof that this is politically-motivated bull**** and nothing more. I always pay attention to the language people use when they call for any type of regulation.

Since when is people trading freely in a PERFECTLY LEGAL commodity a "loophole"? If I log onto Ameritrade and buy a stock am I taking advantage of a "loophole"? When you go to the supermarket and buy a bottle of spaghetti sauce are you taking advantage of a "loophole"?

Let's start by calling this what it is. It is an attempt by people who favor regulation of things to protect people from themselves (without actually knowing how to do it, though, so their solution has "mess" written all over it). There are people who want to regulate the derivatives and swaps markets. Derivatives are complicated investments. They have the potential -- when you create a commodities market around something like energy, which is vital to our economy -- for people to make bad investments, which in turn can have wider-ranging impact on the economy.

But the "speculators are jobbing you and driving up the price of oil" stuff is pure populist bull****. Enron wasn't a speculation problem. It was a FRAUD problem. They did something illegal and criminal -- lied, didn't report correctly to the SEC, made up financials, cooked the books. Derivatives weren't to blame. People acting illegally were.

If you want to police the markets better, it is one thing. But this level of government interference (read up please about what they want to do) is not a simple matter of policing. It is outright regulation -- making up rules that inhibit people's abilities to trade freely and invest.

The arguments for this--since the word "Enron" pushes so many buttons, to me, are akin to saying, "There are people who rob convenience stores. Therefore we should strip search everyone who walks into a convenience store before allowing them to buy a pack of cigarettes."

It is really that simple. Do you agree with that kind of logic?

 

[Boom_70]

Ragu with all due respect for your economic acumen I think you need to do some more research on this one.

If you look at recent supply / demand charts you will see that supplies are up and still outpace demand.

In past few years billions from hedge funds have gone into oil futures which have had the effect of driving up the current price of oil. Prices of actual oil is being pegged to futures market prices of virtual oil .

This used to be a regulated market that became deregulated in 2000 .

Have a look at this extensive report for better background:

http://www.senate.gov/~levin/newsroom/supporting/2006/PSI.gasandoilspec.062606.pdf

 

[The Big Ragu]

If you look at recent supply / demand charts you will see that supplies are up and still outpace demand.

That is SOOOO untrue. It flies in the face of every fact. The Saudis have been cutting production and they are the largest supplier in the world. Our biggest problem right now is that the Arab countries aren't pumping enough oil to meet demand. What you said is just patently untrue. The world supply of oil is NOT MEETING DEMAND. If you insist, I can PROVE it, but I will then get accused of overposting. Then look at worldwide demand. It has been increasing steadily the last few years with Asia being the main cause. Again, I can PROVE this.

And that Congressional report is pure unadulterated bull****. They cite a LAW SCHOOL professor from the University of Maryland, who without anything backing it up with anything HE has done, testified that $25 of the then $90 a barrel price of oil was the result of speculation. It's like they found a warm body to say what they wanted to hear (it suited their political goals) and then they wrote a report actually giving it credence to the exclusion of reality. They could have put Pee Wee Herman before the committee saying that and it isn't any more true. Meanwhile, they glossed over the people who could empirically demonstrate that speculation CAN'T have that much of an effect on a market. Speculation requires buyers and sellers. No one is going to buy a commodity at a price that they believe is going to lose them money in the future. And no one is going to sell at a price they think is too low. Think about how ANY market works. The only way you can throw a market out of whack and manipulate prices to that degree is by doing something illegal. And that is NOT what that report is alleging (or is there any proof there is anything illegal going on -- in fact, a lot of proof to the contrary).

This is little more than bull**** conspiracy theory. What is so sad about it is that these elected officials know it is, but they also know populist rhetoric that resonates with their constituents, so they will feed bull**** on a dumb public and intentionally advocate falsehoods and horrible policy based on those falsehoods.

 

[Boom_70]

More homework Ragu:

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?nav=hcmodule

 

[Twoback]

I find it hard to believe energy companies would be the ones bidding up the raw materials (in this case, crude oil). That's right off the top of their overhead.

Instead I see them gaming the system Enron-syle, via longer-than-expected changeovers to summer blend, or a timely refinery accident, to minimize supply of finished product — and thus maximize profits.

There are other nefarious plots afoot to raise crude prices.

You're wrong.
Say it costs Exxon $8 to get a barrel of oil out of the ground and to the refinery.
(That's just an imaginary figure).
If said barrel is worth $50 a barrel, they make $42.
If said barrel is worth $100, they make $92.
That's why the profits keep going up.
Ragu, this is not a simple supply/demand issue. The speculation in oil is a huge reason for its increase in price -- more people putting more money in that area of the market because they believe there is a comfortable floor and no ceiling. The supply/demand part of the equation only comes into it in the sense that there's a good chance they are right, which leads still more investors into the pool.

 

[The Big Ragu]

More homework Ragu:

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?nav=hcmodule

Don't just provide the link, please. EXPLAIN what is in the link... You cited a 2006 government report saying that $25 of the price of a then $90 barrel of oil was the result of speculation. Now you link to an article that says what has happened to oil RECENTLY is the result of a bubble.

So what is it? You link to something from 2006 saying "It's the speculators!" Mind you, that report is more than two years old. And you link to an article now saying that the RECENT rise in oil COULD BE (it doesn't actually draw a conclusion, just quotes different people) the result of the, um, "speculators," and quotes someone saying it could be a bubble. The two things you just linked to are inconsistent. Unless we are in the midst of a never-ending bubble.

Pay attention to the quotes in that story like this: "It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation."

The reason I say that has nothing to do with Iran and how much that is influencing the futures market. It's to point out that the commodities market isn't the result of people somehow manipulalting prices. The market makes a reasonable guess about where the price of oil is headed based on what is going on the world. To the extent that there is speculation in the market (because most of the trading is by people who are involved in the business, who want to hedge their exposure), no one is betting on a price of oil that is higher than where they really believe it is headed. No one wants to lose money!

This is such a ridiculous line of thinking. The price of oil could be moving toward $200 a barrel. I can cite a zillion factors that make that a bet with better than 50/50 odds, including statements from the OPEC chief recently, the prospect of a fight with Iran, the weak U.S. economy, the weak U.S. dollar, etc.

So the commodities market is running up right now -- futures prices on oil are rising, BECAUSE people trading in those instruments see where things are headed.

But now people turn around say, "It's all because of the speculators!"

It's confusing cause with effect.

Speculators don't cause the market to behave the way it does. They are just placing future orders based on where they can reasonably see the price of oil headed. They aren't creating those world factors. They are just investing BASED on what they see.

If you take away the futures market, you are still going to get that rise in the price of oil we are looking at--and it is a pretty safe bet it is going to get much more expensive. The only thing you will do is make it impossible for people who are in that business to hedge their exposure.

In any case, explain how your 2006 report jibes with that newspaper article which makes the case that this is a RECENT bubble.

It's the same populist bull****. The 2006 report is political. The newspaper article is typical journalism. Find people to give quotes giving credence to two things and you are being "objective." And voila, instant newspaper filler.

 

[Boom_70]

More homework Ragu:

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?nav=hcmodule

Don't just provide the link, please. EXPLAIN what is in the link... You cited a 2006 government report saying that $25 of the price of a then $90 barrel of oil was the result of speculation. Now you link to an article that says what has happened to oil RECENTLY is the result of a bubble.

So what is it? You link to something from 2006 saying "It's the speculators!" Mind you, that report is more than two years old. And you link to an article now saying that the RECENT rise in oil COULD BE (it doesn't actually draw a conclusion, just quotes different people) the result of the, um, "speculators," and quotes someone saying it could be a bubble. The two things you just linked to are inconsistent. Unless we are in the midst of a never-ending bubble.

Pay attention to the quotes in that story like this: "It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation."

The reason I say that has nothing to do with Iran and how much that is influencing the futures market. It's to point out that the commodities market isn't the result of people somehow manipulalting prices. The market makes a reasonable guess about where the price of oil is headed based on what is going on the world. To the extent that there is speculation in the market (because most of the trading is by people who are involved in the business, who want to hedge their exposure), no one is betting on a price of oil that is higher than where they really believe it is headed. No one wants to lose money!

This is such a ridiculous line of thinking. The price of oil could be moving toward $200 a barrel. I can cite a zillion factors that make that a bet with better than 50/50 odds, including statements from the OPEC chief recently, the prospect of a fight with Iran, the weak U.S. economy, the weak U.S. dollar, etc.

So the commodities market is running up right now -- futures prices on oil are rising, BECAUSE people trading in those instruments see where things are headed.

But now people turn around say, "It's all because of the speculators!"

It's confusing cause with effect.

Speculators don't cause the market to behave the way it does. They are just placing future orders based on where they can reasonably see the price of oil headed. They aren't creating those world factors. They are just investing BASED on what they see.

If you take away the futures market, you are still going to get that rise in the price of oil we are looking at--and it is a pretty safe bet it is going to get much more expensive. The only thing you will do is make it impossible for people who are in that business to hedge their exposure.

In any case, explain how your 2006 report jibes with that newspaper article which makes the case that this is a RECENT bubble.

It's the same populist bull****. The 2006 report is political. The newspaper article is typical journalism. Find people to give quotes giving credence to two things and you are being "objective." And voila, instant newspaper filler.

Your explanation is dummer than a bag of canadian pennies. Wait - are you really jr who has hacked into Ragu's account?

The speculative futures trading that is taking place now would not have happened prior to 2000 when the controls were in place. The "Enron loophole" was stuck in commodities bill put into law at the end of 2000. Since then there has been a gradual shift from oil being priced based on supply and demand to pricing being based on the futures market price of oil.

One might argue that at $100 a barrel the demand is still there so the market is fairly priced. It may be so in the short term but in the long run I believe that prices will sink When the dollar starts getting stronger again money will flow out of oil futures and back into dollars.

 

[The Big Ragu]

Your explanation is dummer than a bag of canadian pennies. Wait - are your really jr how has hacked into Ragu's account?

The speculative futures trading that is taking place now would not have happened prior to 2000 when the controls were in place. The "Enron loophole" was stuck in commodities bill put into law at the end of 2000. Since then there has been a gradual shift from oil being priced based on supply and demand to pricing being based on the futures market price of oil.

One might argue that at $100 a barrel the demand is still there so the market is fairly priced. It may be so in the short term but in the long run I believe that prices will sink When the dollar starts getting stronger again money will flow out of oil futures and back into dollars.

Where do I begin? The price of oil IS based on the futures market, as you said. Why is that bad or shocking? It ALWAYS has been based on where the futures market thinks the price is headed... Just as the price of orange juice is based on the futures market. And so is the price of pork bellies. And the price of gold... This is not a BAD thing. It protects people who make their living in those markets against unforseen things that can financially devastate them. That has NOTHING to do with 2000 act that created a new kind of derivative.

I'm either not understanding you or you don't understand what the "Enron Loophole" is and how futures markets work. There has ALWAYS been a futures market for oil. This has nothing to do wit the 2000 act. People traded in oil futures prior to 2000, and either way, 2000 as your starting point (or 2002 when the single-stock derivative was first traded) doesn't explain anything we have seen in the oil markets.

First of all, all the act in 2000 did was create a derivative in single-stock futures. It is just a trading instrument. THAT shouldn't be a threat to anyone. And they are very narrow securities. The act actually has very little bearing on the world oil market, because oil is a commodity that has ALWAYS traded on commodities markets. It was relevant to Enron, because it created a futures market for small energy markets that didn't exist before. They are apples and oranges.

Secondly, if the price of a barrel of oil is overpriced, the market will correct itself. Bubbles always pop (that article you linked to quoted people saying there was a bubble) -- UNLESS you are alleging some sort of manipulation, which is the unspoken bull**** feeding the "Enron loophole" crap. They invoke the name of Enron, which isn't remotely related to this, but pushes buttons, and they characterize perfectly legal trades as "loopholes." All you are doing is limiting a free market and a type of instrument, if you pass this type of regulation and it will have NO effect on the price of oil.

Thirdly, if you think there is manipulation (because you haven't explained how the derivatives or futures markets actually inflate the price of oil; please tell me HOW that is happening, and I will listen), you need to understand that people can BRIEFLY dominate slices of a financial market and manipulate prices. But any notion of prolonged manipulation is ridiculous. You can pump and dump a stock, for example, by hyping a small, obscure stock and then just making a handful of trades to make the price go up. But you can't manipulate the entire stock market. It's impossible.

What you need to do is explain how there is any manipulation going on in that market--if that is what you somehow believe.

What Enron did--which once again was fraud--was to exploit a single state's rules to sell electricity at inflated prices. It was a pretty short-term scheme focused on just one market (the California electricity market). And it was fraudulent! The ONLY way you can compare the world oil market to Enron is to show me how there is some force out there manipulating something much bigger, involving WAY MORE people, and that it hasn't just been a short-term fraud, it has been an ongoing thing -- which is what you are alleging if you think things have been somehow artificially inflated since your arbitrary 2000 starting point. You have to show me how speculators (a bunch of hedge funds) are getting together and saying, "Hey, let's drive the price up!" And then you have to explain how they are doing it and doing it for such a prolonged period.

Also, it flies in the face of how most hedge funds trade. If you run a hedge fund, there is MUCH greater potential to make money on falling prices than by driving prices of a commodity up. Hedge funds can make way more money short selling short, because the profits are unlimited. What some have done is borrow ridiculous amounts of stock, for example, and sell them at current prices to create excess supply that drives down the price. They then buy the shares at the lower price and repay their obligations and collect the profit on the difference. You can do that to any financial instrument -- stock options and other stock and fixed-income derivatives. But it is absolutely illegal to "bear raid" an instrument, where you purposely manipulate the price (for example, by spreading false rumors).

That doesn't apply, though, because you seem to be alleging that oil futures are being manipulated to trade too high, not too low. Either way, though, there is a huge difference between market manipulation and speculation. What is happening in the oil market is that speculators all see the price of oil headed up (And it's a "well, duh" kind of observation) and since anyone with a brain shares the same view they are driving the price--possibly to extremes.

You can't regulate that, though. It will correct itself if that is the case. And once again, if you blame "the speculators" you are confusing cause and effect. You take away the futures market and the price of oil is STILL headed up.

 

[Boom_70]

Aren't fraud and manipulation pretty much the same thing?

Agree there has always been oil futures trading but prior to 2000 it was regulated and as you said its purpose was as a hedge for those in the oil business to lock in their prices.

The Enron loophole took out the ability to regulate the market and brought in billions of dollars of speculative money from companies not even in the energy business.

I've not really taken a close look but it would be intersting to break down the oil company profits to see where most came from. Was it from their refinery business or their speculative oil futures trading.



Ragu - more homework for you: http://select.nytimes.com/2006/09/24/business/24gret.html?scp=4&sq=Commodity+Modernization+act+of+2000&st=nyt

 

[Boom_70]

Not just oil being manipulated. Rice and wheat also which is having dire effect around the world . An interesting perspective from Pakistan.

http://www.dailytimes.com.pk/default.asp?page=2008%5C04%5C23%5Cstory_23-4-2008_pg3_3

If governments of developing countries continue to pander to global capitalist forces, running after imaginary foreign investments that are not there anyway, they will be vulnerable to the highest levels of internal unrest and destruction

Rising commodity prices have left fragile developing economies neither here nor there. Developing countries pressured or advised by the World Bank, IMF and the US, opened their markets to attract foreign investments. For most of them, real foreign investments have remained illusive because it was a zero sum game to start with. However, global speculative capitalist forces, unhindered by national restrictions, have started destroying them at an accelerated speed.

Now more than ever, effects of speculation on commodity prices in the Chicago Board of Trade or the Kansas wheat market are immediately transmitted to the rest of the world. Presently, US commodity markets are in the grip of a speculative price bubble similar to the one prevalent in real estate markets. After wrecking millions of households, speculative money has taken over essential commodities such as petrol, gas, wheat, rice etc. And this commodity price bubble has started

 

[Football_Bat]

I find it hard to believe energy companies would be the ones bidding up the raw materials (in this case, crude oil). That's right off the top of their overhead.

Instead I see them gaming the system Enron-syle, via longer-than-expected changeovers to summer blend, or a timely refinery accident, to minimize supply of finished product — and thus maximize profits.

There are other nefarious plots afoot to raise crude prices.

You're wrong.
Say it costs Exxon $8 to get a barrel of oil out of the ground and to the refinery.
(That's just an imaginary figure).
If said barrel is worth $50 a barrel, they make $42.
If said barrel is worth $100, they make $92.
That's why the profits keep going up.
Ragu, this is not a simple supply/demand issue. The speculation in oil is a huge reason for its increase in price -- more people putting more money in that area of the market because they believe there is a comfortable floor and no ceiling. The supply/demand part of the equation only comes into it in the sense that there's a good chance they are right, which leads still more investors into the pool.

Ah, but you're assuming the cost of getting that oil from the ground to the refinery is fixed. It isn't. Supertankers pay for fuel too. But that's neither here nor there. You also assume that the company that drills for oil is the same one pumping it into your car's tank. That is not always so. Valero is the country's biggest refiner and doesn't own one oil well in Saudi. There are so many "middle men" in the biz, it's disgusting.

 

[Ben_Hecht]

More homework Ragu:

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?nav=hcmodule

Don't just provide the link, please. EXPLAIN what is in the link... You cited a 2006 government report saying that $25 of the price of a then $90 barrel of oil was the result of speculation. Now you link to an article that says what has happened to oil RECENTLY is the result of a bubble.

So what is it? You link to something from 2006 saying "It's the speculators!" Mind you, that report is more than two years old. And you link to an article now saying that the RECENT rise in oil COULD BE (it doesn't actually draw a conclusion, just quotes different people) the result of the, um, "speculators," and quotes someone saying it could be a bubble. The two things you just linked to are inconsistent. Unless we are in the midst of a never-ending bubble.

Pay attention to the quotes in that story like this: "It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation."

The reason I say that has nothing to do with Iran and how much that is influencing the futures market. It's to point out that the commodities market isn't the result of people somehow manipulalting prices. The market makes a reasonable guess about where the price of oil is headed based on what is going on the world. To the extent that there is speculation in the market (because most of the trading is by people who are involved in the business, who want to hedge their exposure), no one is betting on a price of oil that is higher than where they really believe it is headed. No one wants to lose money!

This is such a ridiculous line of thinking. The price of oil could be moving toward $200 a barrel. I can cite a zillion factors that make that a bet with better than 50/50 odds, including statements from the OPEC chief recently, the prospect of a fight with Iran, the weak U.S. economy, the weak U.S. dollar, etc.

So the commodities market is running up right now -- futures prices on oil are rising, BECAUSE people trading in those instruments see where things are headed.

But now people turn around say, "It's all because of the speculators!"

It's confusing cause with effect.

Speculators don't cause the market to behave the way it does. They are just placing future orders based on where they can reasonably see the price of oil headed. They aren't creating those world factors. They are just investing BASED on what they see.

If you take away the futures market, you are still going to get that rise in the price of oil we are looking at--and it is a pretty safe bet it is going to get much more expensive. The only thing you will do is make it impossible for people who are in that business to hedge their exposure.

In any case, explain how your 2006 report jibes with that newspaper article which makes the case that this is a RECENT bubble.

It's the same populist bull****. The 2006 report is political. The newspaper article is typical journalism. Find people to give quotes giving credence to two things and you are being "objective." And voila, instant newspaper filler.

Your explanation is dummer than a bag of canadian pennies. Wait - are you really jr who has hacked into Ragu's account?

The speculative futures trading that is taking place now would not have happened prior to 2000 when the controls were in place. The "Enron loophole" was stuck in commodities bill put into law at the end of 2000. Since then there has been a gradual shift from oil being priced based on supply and demand to pricing being based on the futures market price of oil.

One might argue that at $100 a barrel the demand is still there so the market is fairly priced. It may be so in the short term but in the long run I believe that prices will sink When the dollar starts getting stronger again money will flow out of oil futures and back into dollars.

That has scant chance of happening until the current executive-connected "borrow and spend" whores are thrown wailing into the American Standard and flushed, heartily . . .