That 70’s Show

There is no shortage
 of theories as to why Americans are finding themselves staring 
helplessly at rising gas prices, but few of them are real. In fact, much 
of the prevailing wisdom offered by television pundits is false.

He was a relative unknown when he campaigned for president of an America 
that was worn down from foreign intervention, a sick economy and
 Republican rule. His outsider status brought with him a new brand of
 hope that the media devoured allowing his star to rise quickly and shine
 brightly. Upon taking the presidency, however, the beleaguered economy
 stubbornly refused to show signs of life, energy prices rose to 
troubling levels and the Middle East began to spin wildly out of
 control. Things were so bad he even had to step in and bail out an
American car company with government funds.

After only three years, it was all over but for the counting. His star
 faded quickly as the once-media darling became anathema to an
 increasingly conservative American public that spent the last year of 
his term looking for a new “Mr. Right” in every sense.

Such was the fate of Jimmy Carter, who never had a shot at re-election;
 and a good argument can be made that Barack Obama will suffer the same 
fate under nearly identical circumstances.

There is so much involved in the making and unmaking of a president that
 it’s unfair to boil a career down to only a few factors. But in Jimmy
 Carter’s case I believe it is fair to say that three primary issues were
 the undoing of his presidency: the hostage crisis in Iran, stagflation
 and fuel prices at the pump.

Iran wasn’t a military crisis as much as it was an embarrassment to the
United States, though talk of a nuclear Iran was percolating even then.
 Prior meddling in the Middle East came back to haunt us in a situation 
we couldn’t control, with Carter ill-equipped to handle the predicament
 of Americans held hostage in Tehran. Rising oil prices—the result of the 
Iranian revolution in 1979 and the panic that ensued in the trading
 markets—brought about a second shortage within a decade and with it 
hysteria and inflation. This upward pressure from fuel prices in an
 already inflationary environment spurred the Federal Reserve to begin
 chasing inflation with high interest rates.

In his book Currency Wars, James Rickards addresses the impact of 
American monetary policy on the global economy and cites the “50 percent 
decline in the purchasing power of the dollar from 1977 to 1981.” He
 goes on to depict “a world gone mad,” noting that, “A new term, 
’stagflation,’ was used to describe the unprecedented combination of 
high inflation and stagnation happening in the United States.” 
Most people recall the moment when interest rates reached as high as 20 
percent during this period and point to it as the height of insanity
 during the Carter years. In actuality then-Fed Chairman Paul Volcker 
under Ronald Reagan did this as a one-time shock to the system.  It was
 done in conjunction with vigorous tax cuts to spark consumer spending, a 
tightening of the monetary policy to strengthen the dollar and the
 latent effect of increased oil production, both domestic and abroad.
 With the exception of the tax cuts, these policies and factors would 
likely have occurred anyway as Volcker was a Carter appointee and it was
 Carter who loosened the valve on domestic oil production. Furthermore,
 Reagan would go on to reverse many of these initial tax cuts in a way 
that would make conservatives and Tea Party activists blush today.
 Either way, Jimmy Carter was a victim of pitiful economic circumstances 
that will forever be his legacy in the White House.

Rickards draws some comparisons between the ’70s and today, most notably
 deriding Federal Reserve Chairman Ben Bernanke’s actions of Quantitative 
Easing, a fancy name for printing money—the same currency devaluation
 scheme employed by Nixon—calling them “runaway fiscal and monetary 
policies, which were flooding the world with dollars and causing global
 inflation in food and energy prices.”

This is an interesting point to hang on for a bit. There is no shortage
 of theories as to why Americans are finding themselves staring 
helplessly at rising gas prices, but few of them are real. In fact, much 
of the prevailing wisdom offered by television pundits is false. It’s
 not Obama’s refusal to “drill baby drill” or increased demand from 
China. It’s not Libya or Iran, either. It’s the abundance of liquidity 
in the markets matched with the ability of investment banks, hedge funds
 and oil companies to trade energy futures on commodities exchanges
 without any limits or transparency. And this is the result of 30 years
of deregulation beginning with Carter and continuing through Obama.

Before the commodities exchanges were deregulated there were few safe 
places to “park” excess capital during volatile periods. Today these
 exchanges are the perfect shelters for investors with excess liquidity
 because many of them are allowed to stand on all sides of the 
transaction. An investor such as an investment bank or an oil company 
can be the buyer, seller, broker and manufacturer, and can therefore
more easily predict the future behavior of pricing by both forecasting 
the future price of a commodity it owns while moving the market with
 enormous capital infusions. It’s more than the ultimate hedge. It’s a
 scam.

With a crisis brewing in Iran, the markets and pundits are once again in 
a tizzy, and consumers are bracing for the worst. This brings us to what 
might be the nail in Barack Obama’s coffin: inflation.
 When fuel prices rise, even for a brief period, it shows up within
 months in our food and other consumables. It’s a necessary evil in the
 production of nearly everything we consume on the planet, which is why
 it’s so utterly dangerous to leave the process of trading energy futures 
unregulated. Oil doesn’t have to reach $200 per barrel to destroy any
 hope of economic recovery and, worse, force mass starvation around the
 globe.

If the price is sustained at $100-plus per barrel without relief
 while we continue to suppress interest rates and flood the market with
 the dollar, Bernanke and Co. will have difficulty stemming the natural
 tide of inflation as it works its way around the globe in the things we
 buy and the food we eat.
 Bernanke’s announcement that the Fed will continue to artificially 
suppress interest rates through 2014 and the government’s steadfast
 refusal to implement any reasonable regulation in the markets is a 
self-fulfilling prophecy as investors continue to seek safe harbor for
 their funds in the only market they have any ability to control. This
 will prevent any crash in oil prices that would naturally occur, as we
 witnessed in 2008 when oil hit $147 per barrel then plummeted shortly
 thereafter.

Further fracture in relations with Iran and high oil prices 
will also crush any hopes the European Union has of recovery. And with 
the determined stance that austerity is the EU’s chosen path to
 prosperity, the United States faces the additional problem of having its 
No. 1 consumer of U.S. exports absolutely cash-strapped and constricting
 even further.
 Barack Obama’s re-election hopes are really a matter of timing more than 
anything because the conclusions above are simply common sense and
 arithmetic.

Any chance he had to calm this gathering storm has already
 passed, leaving him at the mercy of the global markets, which are
 teetering on a gigantic bubble. His oratory and confidence are outgunned
 by a conservative media machine pouring on the pressure by falsely 
blaming his energy policy for high oil prices and stoking the fire with
 Iran, thus creating all the necessary traps for his demise. Even if he 
were able to truly force real change in the oversight of the financial
 markets, it would spook Wall Street and could incite panic. And any 
attempt to quiet the saber-rattling between Washington and Tehran would
 make him appear weak compared to a bloodthirsty slate of GOP opponents.

Obama’s only option is to pray the storm doesn’t touch down between now
 and Nov. 6. If it does, instead of occupying the White House in January, 
he’ll be building houses with Jimmy Carter, while Mitt Romney tries to 
figure out where to park all of Anne’s Cadillacs.

$4 Per Gallon: Beating The Oil Drum

America and oil. Perfect together.

Americans are being warned about $4 gasoline at the pumps as an impending and potentially persistent reality. In actuality we’re really being sold on this proposition by the same people who are obfuscating the facts behind what is essentially a looming consumer economic crisis. The triumvirate of the federal government, oil companies and major financial institutions are at the core of disseminating information about, and controlling the pricing of, oil and the varying distillates it produces. I use the term “triumvirate” loosely as it presupposes a separation among the three entities when it has become increasingly apparent they are fused into a singular, inseparable juggernaut where players move freely through revolving doors interconnected through a labyrinth of commissions and exchanges that empty into the special bureau of greed and codependence.

Listen closely to what it is we’re being sold. We’re being fed a barrage of reports about two major drivers of oil prices: demand and unrest. The latter refers to the remarkable and unrelenting spread of democratic uprisings in the Middle East and Northern Africa. While the situations in Egypt and Tunisia had little immediate impact on oil prices because they are marginal players in the energy field, Libya and Bahrain have had a dramatic effect on oil prices because they are fundamentally oil-based economies. (Bahrain, by the way, is half the length and width of Long Island.)

Yet not only does the United States maintain a military base in Bahrain where demonstrations have been organized and peaceful after a shock of initial bloodshed, but Libya produces surprisingly little oil considering the ripple effect the burgeoning civil war is causing. Moreover, the war is being funded by the continuance of oil production operations, which neither side can afford to sabotage to the point of paralysis. The upshot there is that of the 2 percent of global oil production Libya claims, most of it will continue to flow. That being said, suppose for a minute it is halted completely. How could losing temporary access to 2 percent of global production account for a 33 percent increase in pricing? It doesn’t, which leads us to the demand question.

The purported rise in global demand is being attributed to the growth in demand from developing economies and the global economic recovery. Yet in real GDP terms and with respect to indicators such as manufacturing, shipping, job creation – in short, anything that isn’t the Dow Jones Industrial Average – the global economy is still limping toward pre-recession, pre-housing bubble crash levels when oil hovered around $70 per barrel. And even at this level, several commodities experts and economists theorized that as much as 40 percent of the $70/barrel figure was pegged to speculation in the financial markets and not market forces such as supply and demand.

In regards to new demand from developing nations, new areas of production in Canada and Africa as well as deep-sea, offshore drilling are keeping pace with demand as evidenced by the sustained levels of reserves around the globe. Even the Obama administration, which has stated that tapping our own strategic oil reserves is a viable option to increase supply and suppress oil prices, admits in the same breath that supply isn’t the issue. This is hocus-pocus to distract us all from what the actual issue is. For clarity on the real reason behind the spike in oil prices, one need look no further than the mini-oil crisis in the summer of 2008 and the federal government’s response in the months, and now years, that followed.

CLICK HERE TO READ THE LONG ISLAND PRESS COVER STORY ABOUT THE OIL SCANDAL OF 2008

When the price of a barrel of crude oil topped $145 in 2008, rampant speculation was ultimately blamed for the anomaly but only after the major banks and trading institutions could no longer blame increasing demand with a straight face. They simply pushed that line too hard to keep up the ruse. If ever there was even a question about the role of speculation and the government’s willingness to cover for the big banks, all was answered in my mind by the U.S. government response, or lack thereof.

Federal regulators made a big fuss over the creation of more stringent regulation on the commodities exchanges by moving oil trading from opaque over the counter (OTC) exchanges to more “legitimate” exchanges with greater transparency. Or so we were told. The big winner in this move: The Intercontinental Exchange, or the ICE. The ICE is aptly named because any attempt to investigate this exchange ends up cold. Here’s where it gets interesting and perfectly illustrates the symbiotic relationship between the federal government and big banking.

The most helpful context I can place this explanation in is to stress the point that the ICE is a business. It was established for the purpose of providing an efficient electronic trading infrastructure for energy commodities. Trading energy futures before the Atlanta-based ICE was established was confusing, inefficient and antiquated. But the ICE was a small operation until then-President George W. Bush granted it status as a foreign exchange because it purchased a trading desk in London even though the entire trading infrastructure was based in Atlanta. Foreign exchanges aren’t subject to the same oversight as domestic ones. So even though the Commodities Futures Trading Commission (CFTC) interacts with and governs some of the procedures at the ICE, no one can actually see who is doing the trading. This one small regulatory change put the ICE on the map and set the groundwork for one of the greatest, yet most obscure, con jobs ever pulled on the American people.

I call it a con job because the ICE falsely professes to be a bastion of transparency, going so far as to describe itself as “an alternative to the previously fragmented and opaque markets.” So let’s be transparent about this supposed transparency the ICE purportedly affords. It has nothing to do with the ability to witness transactions or those who are doing them, but to simplify the transaction process. It’s the equivalent of your bank offering online banking for your checking account. It’s fast and easy but doesn’t mean your neighbor can see you doing it.

Now consider who is doing the trading. Are you? My guess is no.

The only ones with the financial strength to risk betting on oil futures that would also benefit from anonymity are financial institutions and oil companies themselves. And that’s precisely what they’re doing. Now that you’re armed with an understanding of the fundamentals behind the commodities market, take a gander at the incestuous family tree of oil trading. Once you follow the money you’ll never again question why prices at the pump are so high.

• The ICE is a public, for-profit business traded on the New York Stock Exchange that takes in almost one billion dollars in transaction fees from commodities trading and has performed better than all other major exchanges in recent years.

• The founders of the ICE are Morgan Stanley, Goldman Sachs and British Petroleum (now BP)

• Morgan Stanley is not only a financial institution. If you add up their direct holdings in the oil business, they would be one of the world’s biggest oil companies.

• Gary Gensler, chairman of the CFTC, is a former Goldman Sachs partner

• Jeffrey Sprecher, chairman and CEO of the ICE, is on the CFTC Energy and Environmental Markets Advisory Committee alongside representatives from JP Morgan, Morgan Stanley, Goldman Sachs and Merrill Lynch

The takeaway: The government has cleared the way for banks and oil companies (sometimes one in the same) to determine the price of oil by investing large sums of money no one can see on a trading exchange they own and direct.

If you follow this logic, dig this scenario. (Or “digg” it if you’re reading this online – thanks in advance for the plug). Instead of cracking down on this legalized price-fixing and collusion scheme, the government rewarded everyone involved. In 2009 it granted the ICE the ability to trade credit default swaps (remember those?) in order to provide “more transparency” to these troubled investment vehicles by moving them from OTC exchanges. Sound familiar? The ICE got this part of their exchange up and running in 2010 ahead of schedule.

With the regulatory wind of the White House at their backs and a gullible public duped by propaganda about unrest in the Middle East being responsible for the spike in oil prices, Wall Street is having its way with us all.

In case you were wondering what their take on this sorry state of affairs is, Morgan Stanley analysts David Greenlaw and Ted Wieseman offer the following sentiment: “Of course, the increase in oil prices transfers income (and wealth) to oil producers, and the effect on global growth will depend on how the producers spend their windfall.” A rhetorical question if ever there was one; after all, when’s the last time ExxonMobil cut you a check? 

So the next time you’re gritting your teeth at the pump and cursing the day you walked into the SUV dealership, you’ll know who’s really taking your money. Unfortunately, you’ll also realize that there’s not a damn thing you can do about it. 

CLICK HERE TO READ JED MOREY’S RESPONSE TO THE BP OIL SPILL AND OUR OIL ADDICTION