Ah Enron! This Time Graham of Texas and Commodities Speculation

New York Times Blog:

June 25, 2008, 6:43 pm
The Petro-Manipulators
Anyone who lived on the West Coast during the phony energy crisis of 2000 and 2001 cannot help thinking of Texas and two of its worst products — Enron and a politician not named George Bush — as gas creeps up toward $5 a gallon this summer.
What happened during the great energy heist at the start of the new century was like an extended bad dream, part “Twilight Zone” and part “Chinatown,” the extraordinary 1974 film about water manipulation and long-buried secrets.
The price of energy spiked — tenfold, a hundredfold — despite low demand. Californians became the most efficient users of power in the nation, and still suffered through dozens of rolling blackouts. None of it added up.
And into the worst energy crisis since the Arab oil embargo of 1973 came Vice President Dick Cheney, blasting conservation as a sissy virtue and saying the nation needed to build a new power plant every week for the next 20 years.
The administration’s neglect was breathtaking, a harbinger of what was to come when a natural disaster, Hurricane Katrina, would do to Louisiana what a man-made disaster had done to California. We now know, of course, that the problem eight years ago was caused by manipulation by Enron and other speculators who gamed a faulty system, sticking it to Grandma Millie while laughing at how easy it was to rob 40 million people.
Now consider the present dilemma: oil doubling over the last year, gas at $4.50 a gallon in places and the oversized influence of speculators in a market where few used to tread. Big investors are free to run up oil futures contracts thanks in part to former Senator Phil Gramm. He is the Texas Republican who co-sponsored the so-called Enron loophole in 2000 at the behest of what was later found to be one of the nation’s biggest criminal enterprises.
Enron may be gone, but its legacy lingers in the work done by politicians who did its bidding. And Gramm, who once told corporate contributors, “I have the most reliable friend you can have in American politics, and that’s ready money,” is now the chief economic adviser to Senator John McCain.
Gramm’s role in helping to unleash energy speculators has been well-documented in recent months, and Senator Barack Obama has made an issue of it. Both Obama and McCain have called for closing the loophole. But just how big a role that kind of global gambling plays in the overheated commodities market is only now coming to light.
Testifying before the Senate on Wednesday, the ever-knowledgeable Daniel Yergin blamed speculation for part of the run-up. Yergin, an author and the chairman of Cambridge Energy Research Associates, and pointed to numerous other causes, as have other experts.
But he also noted that 2007 may have been the peak year for oil demand in the United States. In other words, the world’s largest energy consumer has reached the height of its gluttony, and will be using less oil from here on out.
Keep that in mind when thinking of the parallel to California. Less demand from the biggest consumer, yet record high prices. Why? Yes, tight supply during the end stages of the 200-year reign of fossil fuels, higher use by China and India, and global troubles all contribute to the bloat of oil prices.
But market manipulation seems obvious.
Over the last five years, investment in index funds tied to commodities like energy and food has gone from $13 billion to $260 billion. At the same time, the prices of those commodities have risen 200 percent.
Take away the excess speculators who are in the market purely for the ride, and oil prices could drop by half. That’s the view of Michael W. Masters, a hedge fund manager who’s been advising Congress this year.
“There are no lines at the gas pumps and there is plenty of food on the shelves,” said Masters, whose testimony has been widely discussed in financial circles but rarely in the political realm. What has changed, he said, is the presence of big speculators making futures bets.
“If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in price, making these essential items unaffordable to sick and dying people, society would be justly outraged,” he said.
This testimony came before a committee chaired by Senator Joseph Lieberman, the former Democratic vice presidential candidate who is now one of John McCain’s biggest boosters. If you want to see the effects of McCain’s top financial adviser, look no further than the hearing run by McCain’s top ally in the Senate.
With five months to go, it looks like energy will dominate the presidential campaign. Nutty ideas will abound, from the gas tax holiday to $300 million prizes for wonder batteries.
And just as in California eight years ago, the oil industry’s most devoted politicians will use this troubled time to advance a tired agenda – more drilling for the last of the nation’s oil, in distant, fragile corners of the earth.
If nothing else, we should remember the lesson from that debacle: When something smells this bad, look for rotten fish as well.
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1.June 25th,
2008
10:01 pm I agree with the conclusion of this article, but disagree with how it gets there. I have been following fellow NY times columnist Paul Krugman’s ideas on speculation and have to say that I am not buying into the speculation theory of rising gas prices. It just doesn’t logically make sense when looking at the math. Read Krugman’s blog, he has a lot of entries on this topic and they are backed up by multiple sources.
However, I think there are some rotten fish out there that need to be sussed out. Maybe we should stop subsidizing the oil companies quite so much. Maybe we should stop burning gas quite so much.

I currently live in thailand where gas costs around $5.25 a gallon and where the average college graduate makes around $300 a month. People here are living just fine. They drive motorcycles instead of cars, and when they do drive cars, they make sure they are filled up with people (sometimes too many- I’ve seen pick up trucks with 30 people in the back). America will just need to adjust to what the rest of the world already knows: Energy is expensive. Use it wisely.

— Posted by Marshall Balick
2.June 25th,
2008
10:04 pm Yes, Enron gamed the power market in California. It was pretty easy because the market was semi-controlled. There were not sufficient mechanisms for high prices to cause demand destruction. Oil, on the other hand, trades pretty much in a free market. And we should be thankful. Today’s high prices are a better reflection of the true cost and value of oil. I hope prices keep going up. Maybe then people will think twice before buying a two-ton land yacht they don’t need. Gasoline demand is down a little bit in the U.S. this year. Isn’t that a good thing? Or should our government try artificially lower oil prices to encourage increased demand and use? To do so would be papering over the fact that demand is exceeding supply. Here are some more facts. Speculative length in the oil market has been decreasing and prices are going up. That’s right. The speculators have been selling and price is rising. And, inventories of oil in the U.S. (as reported weekly by the Department of Energy) are falling. It’s not the speculators causing inventories to fall. So any clown in front of congress who says “remove speculation and the price of oil will fall to $75/barrel” is both wrong in the short run, and promoting bad policy. Does anyone remember how we beat the Russians? We went with a free-market economy, and it worked. Their government tried a price-controlled economy, and it collapsed under it’s own weight. Now, as a country, which direction do we want to go?

— Posted by MWB