UPDATED 5/25/11: Ancient tribes blamed angry deities for their troubles. Drought? The goddess of rain is angry. Four dollar gasoline? There is always that push to blame the Arab oil producers, but, right now, production is peak and supply is good. So why, in a supply and demand marketplace, are you paying $4.00/gallon for gas? Don’t pray to St. Clampett, patron saint of oil production, but lay the blame at the feet of the same people who are socially re-engineering the United States in their image: The Koch Brothers.
The fourth richest Americans, David and Charles Koch (pronounced “Coke”), who fund Tea Party extremism by way of more than 80 Right-Wing organizations, get a number of their billions from their oil business, and their financial consulting business.
A lot of conservatives will bristle when you say that the Koch Brothers are engaged in questionable business practices. ’It’s the free market, not the Kochs!’ you can hear them decry.
Except the Koch Brothers don’t believe in the free market. Their reported manipulations of the oil futures, based on their ability to sideline huge volumes of oil, make the market anything but free.
What is a Contango Strategy?
It is a tactic by owners of commodities to drive the prices up when a commodity market is in what is called a ”contango.” Future prices are expected to rise because demand is expected to outstrip supply. Commodites traders speculate on that price. The ones who bet on the right number and win can reap millions. Hypothetically, the price should be driven by the free market. Except that, in many cases, it isn’t. A few wealthy people with the money to buy oil and park it on the sidelines can alter the supply & demand system enough to drive prices up, and profit handsomely from doing it.
In 2008, Fortune magazine writer Jon Birger wrote an exceptional piece on contango strategy and how it inflates oil prices. The big players in this? 2008′s Melt-Down darlings, Goldman Sachs, and, of course, those whom many credit as the inventors of the strategy, Koch Supply & Trading, a unit of Koch Industries, the business owned by the same politically meddling brothers Koch.
Even though futures traders get blamed for the prices in the market, it is the contango manipulators that are really to blame. Birger writes:
“Unlike futures flippers, contango traders really do impact oil prices, yet they’re getting a free pass. According to the U.S. Energy Information Agency, domestic oil inventories have risen 9% since oil prices peaked in early July. While some of that is attributable to the weak economy and slack energy demand, gasoline consumption declined only 5% over the same period and gasoline inventories have risen only 4%. (If you’re wondering why contango traders would target crude oil but not gasoline, vaporization issues make gasoline harder to store.)”
The trick is to find as much space to sideline oil at a cheap price:
Demand for oil storage is so keen today that some big investors who can’t secure storage on land have resorted to leasing supertankers and using them as floating oil tanks. For example, the U.S. oil trading firm Koch Supply & Trading recently leased the 2-million-barrel-capacity Dubai Titan, a Koch spokesperson confirms, the third supertanker Koch has leased this year.
Can an organization like this really manipulate the whole oil market? Koch identifies itself as “among the world’s top five crude oil traders and actively trades about 50 types of crude oil around the world.”
Birger wrote that sidelining a few million barrels of crude oil can affect the price, but not the politics of holding market manipulators accountable:
“Based on the estimates I’ve seen, a 200,000 barrel-a-day decrease in supply could raise gasoline prices by anywhere from 20 to 40 cents a gallon.
For the average consumer, that’s real money. But I bet you a barrel or two that actual oil investors like Koch never get targeted by Congress the same way the hedge funds and index funds did this past summer.”
If 200,000 will do that, what will two or three million barrels in storage do?
In a May 12, 2009 article in The Business Times, “Managing Risks in Uncertain Times,” Koch Refining director and finance director David Chang not only acknowledged that Koch benefits from artificially manipulating the oil market by withholding supply, but that it makes even more money in its financial arm by speculating for itself on its manipulations, and advising its clients when they’re doing it to have them profit handsomely on that manipulation:
“CHANG: The drop in crude oil prices from more than US$145 per barrel in July 2008 to less than US$35 per barrel in December 2008 has presented opportunities for companies such as ours. In the physical business, purchases of crude oil from producers and storing offshore in tankers allow us to benefit from the contango market where crude prices are higher for future delivery than for prompt delivery. For our paper business, we are working more actively with our customers on hedging… Because we trade in both the physical and the paper markets, we can offer customers insights into the dynamics of physical supply and demand, and how this ties in with their hedging plans, something which banks may not be able to offer.”
Someone should stop this, you say? The Hunt Brothers, former Texas billionaires, paid millions in fines and in compensation when they tried to corner the silver market. Why is this any different?
It’s not. Former senator Christopher Dodd (D-CT.) and Representative Barney Frank (D-NY.) authored the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in August, 2010. Part of that law was sweeping rule changes for commodities speculation. One of the last things passed in the Democratic congress, the new Koch Brothers-funded Tea Party House has been holding hearings to find ways to derail Dodd-Frank.
The Hunt Brothers were found guilty in the 1980s when they tried to corner the silver market, and almost collapsed it. Cornering the far more economically essential oil market? Perhaps the Koch Brothers should be facing an inquiry by our Attorney General.
Congress should outlaw the practice of contango market manipulation. It will never happen, though, because there are too many well-paid minions of Koch Industries to ever get that vote passed.
The New York Times reported this morning that the Justice Department and the Commodities Futures Trading Commission (CFTC) filed against a handful of small fish:
“With oil prices climbing again this year, President Obama has asked Attorney General Eric H. Holder Jr. to set up a working group to look into fraud in oil and gas markets and “safeguard against unlawful consumer harm.”
“In the case filed Tuesday, the defendants — James T. Dyer of Australia, Nicholas J. Wildgoose of Rancho Santa Fe, Calif., and three related companies, Parnon Energy of California, Arcadia Petroleum of Britain and Arcadia Energy, a Swiss company — have told regulators they deny they manipulated the market.
“If the United States proves the claims, the defendants may give up $50 million in profits that were believed to be made as a result of the manipulation and also pay a penalty of up to $150 million.”
The connect-the-dots answer as to why the Koch Brothers lavish money on ultra-Right political action groups and candidates is simple. The “less government” mantra is all about less regulation and oversight. Fewer eyes and fewer rules allow big commodity traders like the Koch Brothers manipulate the price of that commodity. The extra millions that they reap in profits in turn escalate the cost of gasoline, then foodstuffs, other goods and services. It puts even more hardship on the already hard pressed middle class.
$4.50 gas. The $12.00 burger that used to be $8.00. The barbershop haircut that is $15.00 that was $10 just a few years earlier. All of these are the fallout from higher gas prices in a time when supply is plentiful, and demand is actually down.
Then there is the irony of ironies: The people most hammered by all of this include most, if not all of the Tea Party regulars. The Koch Brothers lead the charge for a handful of very rich people to pick Joe Average’s pocket at the pump, then Joe goes out to campaign against raising the Koch Brothers taxes 3%.
Forrest Gump was right. Stupid is as stupid does. The Justice Department needs to investigate the Koch Brothers. Tell them so: AskDOJ@usdoj.gov
My shiny two.
Learn more about the Koch Brothers in a 60 Minutes II interview with their biggest critic: Their younger brother, Bill.