Wikileaks: Speculators Helped Cause Oil Bubble
Bill Totten
Rolling Stone (May 26 2011)
When oil prices surged to a ridiculous $147 a barrel in the summer of
2008, conventional wisdom held that normal supply and demand issues were
the cause. Both the Bush administration (in the form of the Commodity
Futures Trading Commission) and most of Wall Street (through both media
figures and market analysts) blamed such factors as increases in oil
demand from the Chinese industrial machine, and the failure of Americans
to conserve, for the surge in crude prices.
Goldman Sachs, while outrageously predicting a "super spike" that might
cause oil to reach as high as $200 a barrel, blamed piggish American
consumers and preached conservation as a bulwark against oil supply
disruptions. The bank's "Oracle of Oil", Arjun Murti, even broadcast the
fact that he owned two hybrid cars.
Well, thanks to Wikileaks, we now know {1} that when the Bush
administration reached out to the Saudis in the summer of 2008 to ask them
to increase oil production to lower prices, the Saudis responded by saying
they were having a hard time finding buyers for their oil as it was, and
instead asked the Bush administration to rein in Wall Street speculators.
According to the McClatchy report, the Wiki cables show that Saudi
ministers repeatedly told Bush administration officials that increasing
production might be counterproductive.
The cables show that at the height of the bubble, in May 2008, US
officials met in Riyadh with the Saudi assistant petroleum minister,
Prince Abdulazziz bin Salman bin Abdulaziz al Saud, who told the US he was
"extremely worried" that high prices would destroy the demand for crude.
"Aramco is trying to sell more, but frankly there are no buyers", he
reportedly said, referring to the Saudi state oil company. "We are
discounting buyers".
The issue here, which I covered somewhat in Griftopia (2010) and in "The
Great American Bubble Machine" {1}, revolves around the influx of
speculative money into the commodities markets. Because of various changes
to the way commodities were traded - including a series of semi-secret
exemptions handed out to commodities speculators, allowing companies like
Goldman Sachs to popularize commodities speculation - there was, by the
summer of 2008, a cascade of investor money pouring into commodities,
mostly all betting on a rise of commodity prices. Much of this might have
been due to money flowing out of mortgages and into the "safe" haven of
commodities, with exploding energy prices being an unwelcome side effect.
While there was less than $20 billion of speculative activity in
commodities in the early 2000s, by 2008 that number had jumped up to well
over $200 billion, with virtually all that money being "long" money, that
is, bets on a rise in prices. All of that new money turned into a
battering ram pushing prices through the roof. We are seeing the same
phenomenon this year.
The Wiki documents show that the Saudis had long ago concluded that this
increased investor flow was a threat to disrupt the markets. An embassy
cable from 2007 recounted a meeting US officials had with Yasser Mufti, an
Aramco planner. "The Saudi analysts indicated a link between higher oil
prices and the influx of investor funds into the oil markets", it read.
The cables also show that the Saudis urged the Americans to enact reforms
to rein in Wall Street, calling for speculative limits and other changes.
It also showed that some Saudi officials believed that speculation added
as much as $40 to the oil price during the height of the bubble.
All of this is significant because both the Bush administration and the
Obama administration have denied this narrative to various degrees. The
Commodity Futures Trading Commission only recently admitted that
speculation played a role in the 2008 mess, having originally (and
stubbornly) blamed supply and demand issues. Subsequent analyses have
shown that the Saudi position, that worldwide demand for oil never
increased nearly enough to account for the gigantic 2008 price spike, was
almost certainly correct.
More on this to come later. Given the surge in commodities prices in the
last year (which may in part have caused the rise in food prices that led
to disturbances in the Middle East) and the Obama administration's seeming
reluctance still to rein in speculators, it's remarkable that this issue
doesn't get more press. It'll be interesting to see how much ink these
Wiki cables get.
Links:
{1}
http://www.mcclatchydc.com/2011/05/25/114759/wikileaks-saudis-often-warned.html
{2}
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
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