WALL STREET SPECULATION AFFECTED THE WILD SWINGS IN OIL PRICES OVER THE PAST YEAR MORE SO THAN SUPPLY AND DEMAND ? "60 MINUTES" SUNDAY ON CBS
The historic swings in oil prices last year were the result of financial speculation from Wall Street and not supply and demand say several sources from the financial and oil communities. Leading the charge in making huge bets on the price of oil were investment banks and hedge funds, these sources tell Steve Kroft for a report to be broadcast on 60 MINUTES Sunday, Jan. 11 (7:00-8:00 PM, ET/PT) on the CBS Television Network.
Michael Masters, a hedge fund manager who tracks the flow of investments in and out of markets, noticed huge amounts of money going from stocks and bonds into oil futures. He believes hedge funds and investment banks influenced those investors. "The investment banks facilitated it. They found folks to write papers espousing the benefits of investing in commodities," he tells Kroft. The promotion helped convince their clients that an investment in oil futures was an "asset class" investment like stocks or bonds says Masters.
Entities such as "The California Pension fund. Harvard Endowment. Lots of large institutional investors...hedge funds, Wall Street trading desks" says Masters, were buying up most of the oil futures on the market. So, instead of oil users like airlines or power companies owning most of the oil futures, it was speculators trying to make money. "And that was driving the price up," he says. To bolster his claim, Masters points to Energy Information Administration data saying worldwide demand for oil decreased just as its supply increased - the classic scenario for a price plunge - in the last quarter of 2007 through first quarter of 2008. Instead, a huge spike in oil prices occurred.
This incensed the president of the Petroleum Marketers Association, Dan Gilligan, because his members were accused of price gouging. He tells Kroft that during the spike in oil prices last year the speculative entities held "approximately 60 to 70 percent of the oil contracts in the futures markets." Gilligan says companies like Goldman Sachs and Morgan Stanley have as much to do with the high price of oil as an oil company like Exxon-Mobil. He says he teases people by asking them if they know what the biggest oil company in America is. "And they'll always say 'Exxon-Mobil or Chevron or BP' but I'll say 'No. Morgan Stanley.'"
Goldman Sachs and Morgan Stanley declined to be interviewed for this story.
Gilligan says no one can tell whether speculators manipulated the oil futures market because part of the market was deregulated eight years ago and some traders were no longer required to disclose their full holdings. Many of the speculators got out of the futures market recently when the oil price bubble burst with the bankruptcy of Lehman Brothers and the near collapse of AIG insurance - both heavily invested in oil.
Why was the oil futures market deregulated? Michael Greenberger, former director of trading at the Commodity Futures Trading Commission, says it was because of the influence of Enron. The once high-flying energy company went bankrupt and was accused of manipulating electricity prices. They were able to do so, says Greenberger, because controls on speculators were lifted. "When Enron failed, we learned that Enron and their conspirators who used their trading engine were able to drive the price of electricity up, some say by as much as 300 percent, on the West Coast," he tells Kroft.
Asked if traders were purposefully driving the price of oil up before the collapse, Greenberger said he didn't know, but that, "Every Enron trader who knew how to do these manipulations, became the most valuable employee on Wall Street."