Why don’t more consumers know about the ENRON LOOPHOLE and it’s effect on high oil prices?
Enron Loophole? Isn’t that part of the carburetor on an old Ford Fiesta? You’ll have to give a year on that, and a more detailed description on how it is effecting your gas mileage.
Enlighten us . . . please. Rocketman
Don’t read that as “oh, one of those calls for government regulation” - its not so simple.
Basically, the “story” with oil prices these days is not a simple “supply and demand” one b/c a lot of the buyers/sellers of energy products are not producers or consumers/re-sellers of energy products. They are “speculators” - in this case commodities traders who only buy and sell “product X.” They are not in the “business” of buying/selling oil, but just buying/selling any particular product that they can “flip” for a profit. Similar kinds of speculation have been rampant in real estate and contributed a great deal to the recent real estate boom and then crash. In effect, other than artificially low interest rates, one of the things pushing real estate costs up was not just actual supply and demand, but speculative buying and selling real estate. There were tons of “buyers” who weren’t interested in real estate per se - thus artificially inflated demand. A lot of that is currently going on w/ oil prices.
These kinds of activities are certainly just “market” activities - we are supposed to buy and sell with the goal of making profit, but they do very frequently get out of hand creating messes and bubbles and crashes and all sort of different forms of corruption and shady business dealings. The insane market activities frequently result in large meltdowns and disasters (such as the recent subprime mess), and then greater oversight is instituted to try to keep things smoother and less insane.
The Enron debacle was not just “a few bad apples” - it was made possible by and came from a massive deregulation of energy industries.
Those who rail against regulation frequently forget (or never knew) why it was put in place to begin with - it frequently has to do with watching out for the public good. I’m not now going to say that it works - let’s just say that regulation can make problems and messes, but those produced by markets are frequently worse.
Thanks AA. Rocketman
Excellent post AA.
I’m always extemely skeptical of political campaigns, as is the link you gave us. Being a “constitutionalist”, as is Antoni Scalia, I always wrestle also with the whole question of whether it’s really the function of government to control the marketplace beyond protecting the innocent from unscrupulous practices, and in today’s world attempting to balance inequities in international trade caused by the laws of global competitors. While I realize that the feds have their heavy hands everywhere, I think they long ago went way beyond their constitutional authorities.
The “regulation” you refer to, that “watching out for public good”, anything beyond national security and protecting us from predators we’d probably be better off without.
First of all I apologize for my mispelling. I meant High not Hig. But I was distracted by a bowl of ice cream (Neapolitan…MMMM) and forgot to read what I wrote. Anyway you really said it so much better than I could have, AA. I’ve been doing my best to spread the word about this debacle and direct people to www.closetheenronloophole.com. Absolutely NONE of the 30 or more people I’ve asked have ever heard about the ENRON Loophole. I’ve emailed several network news reporters who regularly “report” on oil prices and get no response at all. What is needed is a whole lot of “word of mouth” spreading of this info so people can pressure congress and the White House to undo the mess they created. The one bit of good news is that according to Tom Allen (Representative Maine) “I am also pushing for two other proposals pending in the House to rein in fuel prices. The first would regulate speculators who are now are driving up energy prices through off-market
trading. The Commodity Futures Trading Commission (CFTC) oversees only about 25 to35 percent of all energy commodities trading; the rest of energy speculation occurs without any public oversight. H.R. 4066, the Close the Enron Loophole Act, would
require these market manipulators to abide by the same rules that already govern on-market traders. Transparency and increased oversight by the CFTC will instill confidence in the market, help eliminate unnecessary crude oil price inflation, and give American families a break at the pump.”
As I understand it this bill or one like it has made it to the Senate but is being deliberately kept from coming up for a vote. I strongly urge anyone interested in actually doing something to help bring down oil/gas prices to visit http://closetheenronloophole.com/. If we can get to a tipping point on people putting the pressure on we can have a great effect on this deplorable situation. SPREAD THE WORD! Thanks AA for your help.
The “regulation” you refer to, that “watching out for public good”, anything beyond national security and protecting us from predators we’d probably be better off without.[/i]
Mountainbike, I mostly agree - I’ve often said I’d spout Libertarianism all of the time but only if we could first get rid of the current corporate form. I can’t be on the left b/c I’m too afraid of large govt - but I can’t be on the right b/c I’m too afraid of large corporations. Meanwhile we should all just be afraid of really large organizations - and recognize that the state and large corps have a lot of shared interests. My own read of history (and its not an odd or overly selective one) has the feds mostly growing in response to nasty stuff produced by large business.
Once I get there I end up on the left b/c - for what its worth - I still get to vote for my reps in govt. Since it takes a large organization to compete in power w/ another large organization I’ll take the one I get a vote in. If I want a vote in the corporation I have to buy it - that’s called plutocracy.
It seems to me that the market is too large for speculators to control it for long, if at all. I suspect that it is more a high demand and low supply at this time, though speculation could be a part of it. Are all the refineries damaged by Katrina on line yet? What about increased fuel needs in China, India, and other developing nations? How mucm has refinery capacity grown in the last decade (not much)? I’d look there first.
A major US energy magazine had an editorial on oil prices and the the accepted truth is that the folloing forces drive oil prices:
Demand vs supply; this is the biggest driver
The Political factor; unrest in many oil producing countries.
Supply uncertainties, caused by weather (Katrina), flooding, strikes, accidents and other supply interruptions.
Speculation and hedge fund buying.
Of the above, the underlying supply and demand balance is the main driver. The same magazine now buys into “Peak Oil”, the fact that conventional (liquid) world oil production will peak somewhere between 2012 and 2015.
Please note that neither OPEC or the US government really controls the price of oil at this time.
All three major oil companies (EXXON/Mobil, Shell, BP) finished 2007 with record profits, but all produced less oil than the year before. All three were “sold out”!
The implication isn’t that speculators “control” it - but that they can drive prices wild by coming and going. They are part of the “demand.” We’re not talking about Joe Doe and his measly few hundred thou of investment $$ - we’re talking about “companies” that no one has ever heard of who toss billions around.
Even so, don’t forget that through all of this the major oil companies (which can be put in the “real” demand) category are making money hand over fist. Sooner or later we might start hearing the stories about all of the seedy goings on in the oil industry itself.
Certainly “real” demand has grown quite a but in places like China and India - but it didn’t suddenly “happen” one day. What happened one day was, in fact, Katrina. This was the first big spike in prices at the pump. Notice that we haven’t heard many refinery stories (though we should) but that the rhetoric has subtly shifted to those things Docnick pulled from the Energy mag (above? below?). I buy supply and demand stories at flea markets, for the “hottest” toy at the holidays, and for Superbowl tickets. But not for global oil. Its not as simple as some “conspiracy” - but it certainly ain’t “free market” economics.
Yup, and that should be clarified as WORLD demand!
Any company can produce record profits if the have an essential commodity in a market with way-beyond-prohibitive entry costs and the supply is artificially controlled by a small group that agrees to withhold supply to keep prices inflated. Produce less and production costs go down, produce less with the knowledge that it will raise prices and as long as you don;t cut production too much profits can skyrocket!
But I still maintain that the government’s proper place in the scenerio is to NOT regulate, which also essentially means that many of the restrictive regulations that prohibit pumping oil in areas of the U.S. should not be there.
“The “regulation” you refer to, that “watching out for public good”, anything beyond national security and protecting us from predators we’d probably be better off without.”
A noble and worthwhile way of looking at govt’ in general. The problem is that; what constitutes our “national defense” is the arguable point. Is having a well educated populace to supply our military with the best minds…a solid infrastructure to transport necessary goods and services, for the military if you wish.
How about insuring that imported foof stuffs are safe…national security ?
Control of American industry abroad to insure that it promotes a positive outcome for the good of those who live at home. It’s not all weaponry…it’s peace corps, good will and foreign aid to those that need it. ALL PART OF OUR National security.
While I agree with the idea, I would word it a little different. Government should do only those things that the individual can not properly do. That would include national security, but it would also include providing a set of law for business to operate under (Uniform Commercial Code) and providing protection from businesses that lack competition such as monopolies and oligopolies. It would also include building roads providing air traffic control etc.
Yep, I’d pretty much agree that right now it is the speculators adding a good $30 plus a barrel to the cost. The exchange rate probably added another $20-30. Same thing is happening to corn and wheat. What to do about it? I’m not libertarian and all that foolishness but at some point people need to be held accountable for their disregard for the use of other people’s money. Maybe not this month but a bubble is certainly developing in commodities and these idiots that are risking other people’s money chasing the fast buck in commodities will see their day.
I think of the UCC, the SEC, the Fair Labor Standards Act, and such as being under the heading of protecting us from the unscrupulous.
But the government seems rather to want to protect the unschupulous from us! The financial industry can issue credit cards that lure us with 1.9% “introductory rates” and then suddenly change the rates on everything we charged under that agreement to 18%! And then more if they feel like it! The credit reporting industry can destroy an individual completely with false information and is protected by law from any liability!
The morning paper had an other editorial on energy prices. $100 per barrel is now considered the future normal reference price for planning purposes. Should there be a major economic recesssion in both North America and Asia, the price is expected to fall to $85/barrel. The Canadian government, for instance, uses $78 per barrel in making up its budget and counts on royalty revenues from those barrels to generate its planned revenue.
I’m puzzled why anybody still subscribes to the conspiracy theory; it’s simply world demand growth outpacing supply growth, and everyone running scared. Really bad weather in Brazil has always meant high coffee prices, but these go down again when a good harvest returns, since Brazil can easily put more coffee plants in the supply line.
The situation with oil, on the other hand, is a solid wall, called supply limitation. The state oil companies that conrol 75% of all world oil reserves are not very good at cranking up supply when demand increases rapidly. They don’t spend enough on developing new reserves, and won’t let western companies into their countries to do it fro them. Mexico is you prize example.
If you want to examine a true cartel, look at the diamond business.
Jos E Meehan
“While I agree with the idea, I would word it a little different. Government should do only those things that the individual can not properly do.”
That’s about as well stated as anyone could expect relative to role of Govt. Individual responsibility as well as freedom should not only be expected but protected as well.
Mountainbike; all oil companies would love to have been able to sell more oil in 2007, but they pumped their limits. Even OPEC members, who are supposed to stick together and observe their quotas, cheat like crazy, and pump all they can get away with at ANY PRICE! This is not like the diamond business, where “supply management” allows very high prices to be maintained. A perfect artificial diamond sells for a tiny fraction of a real natural one!
The same so called cartel could not prevent oil prices from plunging to $10 per barrel in the early 80s after the Iranian revolution drove it up to $49.
A good movie to watch is “Trading Places” with Eddy Murphy and Dan Akeroyd. It has several persons trying to drive up the price of orange juice futures, based on crop reports for the US Dept. of Agriculture.
The Hunt Brothers tried to corner the silver market some 20 years ago; they failed miserably.
It isn’t a “conspiracy” per say, in that the goal is not to do damage, but it is a cartel.
Oil supply is not controlled by production capacity. Or demand. It’s controlled for maximum profitability. The industry has long realized that limiting production for this commodity causes prices to rise, meaning simply that production costs go down and revenues go up. If one producer increses production he may cause the price to drop, resulting in his costs having risen but not necessarily his revenues. Too much production increase could cause instability in the market, affecting all producers’ profitability and even their stock prices.
In a normal free market, such a situation would cause competition to enter the market until the market’s production capacity exceeded demand, wherein the marekt value of the commodity would drop, the market would no longer be highly profitable, competition would stabilize, and so would prices. But the oil market’s entry costs and regulations are so enormous, and the product distribution channels so “married” to the existing competitors, that entry ito the market by new competitors is virtually impossible.
So, production becomes controlled by the few major players, who have no incentive to increase production and lots of incentive to keep it below capacity.