The Enron Loophole

[boont]

Michael Greenberger used to run the Division of Trading and Markets for the Commodities Futures Trading Commission. He teaches law at the University of Maryland now. Mr. Greenberger, thanks a lot for your time.

He was interviewed on NPR's Market Place yesterday. I have been saying this for a year...

Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?

Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation being passed, all energy futures traded in the United States or affecting the United States in a significant fashion were regulated by United States regulators under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?

Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole. There is tremendous concern about this on Capitol Hill and on a bipartisan basis, people are drafting legislation to try and get a handle on this and not eliminate speculation, but bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law to escape traditional tested regulation on speculative activities.

Ryssdal: So what's Congress going to do? Congress is going to get together, they're going to pass a law and it's going to say, "CFTC, fix this?"

Greenberger: Well, there are several proposals suggesting or proposing that light shine on these dark markets and some of the legislation goes further than others, but the bottom line is the speculators will, in the end, be policed. We will know who they are, what they're doing, what their controls are, what effect they're having on the market. Maybe we'll find out that there's nothing there.

Ryssdal: So just to be clear, you do think that we're in a bubble, then?

Greenberger: I believe it and I'm certainly not alone in my belief. If you talk to anybody who trades in these markets on a regular basis, they will tell you that the markets are completely dysfunctional and out of control because of speculative activity.

Ryssdal: How long is it going to take then if we are, as you say, in a bubble, for it to work its way through and us to get back to something more realistic for the price of a barrel of oil, whether its 50 bucks or 80 bucks?

Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls?
.

[ats5g]

Why don't the commodities regulators/CFTC/SEC just do what regulators did to the OTC equity/bond marketplace? Make the market participants report all the transactions within 90 seconds to the regulator.

[boont]

" Why don't the commodities regulators..."

Because the law was changed.

b.

[haha]

This guy may be right, or he may be wrong.

But a twig snapping in the forest was heard not long ago when Richard Rainwater exited most of his oil and gas equity positions, as well as his long futures positions.

Most of us who have been long oil and gas production or service this century have large profits. IMO prudence now suggests realizing some or even all of these profits.

boont, you have for a long time indeed been saying this oil and gas price surge has been mostly speculation. For your sake, I hope you have not been acting on your ideas up until now.

Ha

[boont]

"you have for a long time indeed been saying this oil and gas price surge has been mostly speculation" haha

I hold no special expertise in this field. Probably much less than yourself.

And I certainly don't feel it is all speculation, or even mostly speculation, but I do believe that oil markets are such that, at the margins, speculation can have a huge influence.

For instance, for decades Saudi Arabia was able to pretty much control the price of oil because they had the extra pumping capacity that almost no one else had. This meant that they could use their market share, which was by no means huge, compared to all the other oil exporters together, to influence prices up or down.

You will notice that the Saudi oil minister has said, "We see no shortages. If there were shortages we would pump more. Demand is being filled."

I was in California when all the national experts said that no one was manipulating the price of electricity. Then a few years later I read the transcripts of the Enron energy traders as they manipulated the electricity flow to California during the so called "crisis". The Governor lost his job over that fraud.

boont

[Leonidas]

Quote:

Originally Posted by boont I have been saying this for a year...

I've been of the same mind as you since 2006 http://www.early-retirement.org/foru...ion-23917.html

Quote:

Originally Posted by Leonidas There is some compelling evidence that shows that politicians, both Republican and Democratic, have lined their pockets with oil and gas money in order to change laws and regulations that have allowed energy companies and market speculators to drive the futures prices with very little oversight.

I don't have anything against speculators. They make for healthy markets. Hell, I'm a speculator. Production is not meeting the growth in world-wide demand, and ultimately the price will rise. I keep saying that someday this $4 a gallon gas will be "the good old days." But the rate at which the price has risen is not right. It's the Enron-like manipulation, back door trades VIA ICE terminals, etc., all done to spook the cattle into a stampede - that's what makes this oil market so crazy.

[chinaco]

More regulation and visibility is needed in those markets.

There is growing concern about market manipulation. If we don't watch it, we will have another melt down that will affect our economy. The first effect is high inflation, the whiplash when it tumbles will be instability, company failures and huge losses for naive investing public that got caught up in the commodity frenzy. The general stock market will probably tank and go into full bear mode.

The administration needs to put the Justice Department and FBI on it... NOW!

[haha]

Quote:

Originally Posted by chinaco The administration needs to put the Justice Department and FBI on it... NOW!

And the CIA, NSA and KGB.

Ha

[armor99]

Quote:

Originally Posted by boont For instance, for decades Saudi Arabia was able to pretty much control the price of oil because they had the extra pumping capacity that almost no one else had. This meant that they could use their market share, which was by no means huge, compared to all the other oil exporters together, to influence prices up or down.

Ok... this is something that I do not understand. Maybe someone will be kind enough to educate me on this one. I looked up how much oil we get every year from all of the various countries that we get it from. We get more oil every year from Canada and Mexico (both of which are non-OPEC countries), than from Saudi Arabia. If that is true, then how does Saudi Arabia have the power to influence anything?

[FinanceDude]

Quote:

Originally Posted by armor99 Ok... this is something that I do not understand. Maybe someone will be kind enough to educate me on this one. I looked up how much oil we get every year from all of the various countries that we get it from. We get more oil every year from Canada and Mexico (both of which are non-OPEC countries), than from Saudi Arabia. If that is true, then how does Saudi Arabia have the power to influence anything?

It's more of a perceived power to influence, as everyone knows they have the largest oil reserves of easily to get crude. However, isn't Iraq number 4 or 5? WE (the USA) should be getting ALL the crude we need from Iraq, right? I mean, it would help them AND us.........

[haha]

Quote:

Originally Posted by armor99 Ok... this is something that I do not understand. Maybe someone will be kind enough to educate me on this one. I looked up how much oil we get every year from all of the various countries that we get it from. We get more oil every year from Canada and Mexico (both of which are non-OPEC countries), than from Saudi Arabia. If that is true, then how does Saudi Arabia have the power to influence anything?

Oil is fungible. It doesn't really matter who sells what to whom. Historically Saudi Arabia has had a large influence on supply and thus price because they had spare capacity, large reserves, and a small enough population that Saudi production could be increased, or throttled back, according to Saudi perceptions of market conditions.

Either or both of these things may not be true any longer. Saudi production has not increased to any extent in the last couple of years, in spite of very high prices. Also, they clearly know that prices this high will get consuming nations energized in alternate energy and conservation practices, so it would seem that their interests would be served by increasing production. Maybe they can't do so any longer, or maybe they want to let us get started on large capital projects and then pull the price rug out.

My own guess is that they are running up against production constraints, at least when a responsible long term view is taken of maintaining field integrity.

Ha

[CitricAcid]

The reason they had perceived control over the prices is they had a capacity to boost up supply (or so they led us to believe, which has come under questioning lately), while all the other countries were pumping at full capacity anyway. Thus, the only country with any variability in their output also happens to be the country with the largest capabilities to pump, the largest proven oil reserves... they were the only one who could, by changing output, affect price. By how much they reasonably could, or if the markets would overreact, however, is a personal opinion.

Edit: haha beat me to the punch, but yea same stuff

[Leonidas]

Quote:

Originally Posted by haha My own guess is that they are running up against production constraints, at least when a responsible long term view is taken of maintaining field integrity.

If they are, or not, seems to be the big question. They have mostly completed some huge production facility (45 square kilometers or miles, can't remember which) that is supposed to be able to boost production by 500,000 Bpd of light crude and 300,000 cft of gas p/day. I say mostly completed because the completion date has been pushed forward several times in the last year.

[Ed_The_Gypsy]

Hmmm. This is an interesting thread.

[CitricAcid]

Beijing raising prices up to 17% on fuel will have a moderate effect on demand, considering the rate of increase of their demand, the effective energy subsidy of the Chinese Government was at least a part of the increased prices.

[ziggy29]

Quote:

Originally Posted by CitricAcid Beijing raising prices up to 17% on fuel will have a moderate effect on demand, considering the rate of increase of their demand, the effective energy subsidy of the Chinese Government was at least a part of the increased prices.

Apparently the market is convinced this morning that's not really going to happen.

So guess what happens next?

All roads seem to lead to "higher oil", even when you think you're taking a road in the opposite direction.

[CitricAcid]

Well, there IS going to be an oil summit this weekend and Hugo Chavez is running his mouth about Venezuelan oil, so perhaps short-term it doesn't assuage demand that much. Yet, maybe just maybe, it could slightly curb long-term demand.

[d]

Quote:

Originally Posted by FinanceDude WE (the USA) should be getting ALL the crude we need from Iraq, right? I mean, it would help them AND us.........

just "how did all our oil get under all their sand?"