Counter Economics

Oil Details

What is interesting is how little investigation there is into where the money that goes to oil goes. We decided to do this by starting from the retail price of oil, and then using high level percentages. The percentage that goes to countries that we have either invaded or (Iraq) or utterly control (Ecuador) is taken from books that cover both these countries. The percentage of oil revenues that is taken by oil companies is well known, as it was part of the legislation that was passed by the Iraq puppet government (75% of the value of a barrel of oil goes to the US oil company). In Ecuador, something like 4/5s of the revenues that get to the country go to either debt service or to the kleptocracy and often end up in capital flight to Switzerland. The government or “people” get around 1/5 of the money that gets to the country.

Speculative Take

Once the money is brought into the US there is a tremendous take by speculators, which include the major investment banks. We provide reference material that demonstrates that the oil markets have been significantly corrupted and that major concentrated power sources such as Goldman Sachs and the Harvard Endowment are using insider information to maximize their trading profits by creating speculative bubbles. This was encouraged by the Bush Administration’s reduction of marketplace regulation.

Retail Take

At the retail level, most gas stations do not get a piece of oil; instead they sell at very close to their cost, but are expected to make money off of their mini mart by selling alcohol, and food items. So the retail location is not part of the cost of oil to any important degree.

The Game, and How it is Played

The profiteering is so extreme, that we have decided to develop a game. This game attempts to see how low the intermediaries can get the money to be that actually goes to the people of the country that the oil is extracted from. It also gives a good impression why attacking oil rich country is so beneficial. Especially when one considers that the companies that benefit do not have their taxes increased to cover the war costs. The war and reconstruction costs are passed to the US taxpayer, while the benefits accrue to the oil company (and the construction companies and security companies, etc..). So war is extremely profitable and is an attempt by companies to gain a permanent or at least long term concession greatly increasing their monopoly power. One strong reason for attacking Iraq was the sanctions were coming to an end. Once these came to an end, European oil companies would have been allowed into Iraq and American oil companies would have had to compete for business. This way, they simply get the oil with no competition and are able to enforce conqueror terms upon the country. See our estimates below and see who gets what.

The Assumptions

These numbers are estimates. They are not perfect, but then again, these types of numbers are not published for the obvious reason that they look very bad. Oil companies are destabilizing countries around the globe. In the case of Nigeria, Shell is supporting the military junta which massacres its people in order to control them and keep them from receiving anything but a pittance for the oil revenue. Shell lies when they say “they don’t get involved in local politics,” they are deeply involved with turning Nigeria into an apocalyptic state. They have also loaned their tractors to the Nigerian military, which returned them to Shell with blood on them, and this was from using the equipment for the digging of mass graves for citizens which it had killed en mass.

The Nigeria Army periodically burns towns to the ground that they suspect of fighting, being “terrorists” or generally disagreeing with Shell Oil policies of extraction. By being ignorant and supporting Shell Oil we in the west are complicit. It brings up the topic, would we ever have fought the Nazis if they had given us very low prices on oil?

References

It appears that a combination of stripping away oil trading regulation by the Bush Administration as well as the vertical integration into trading by major investment banks have deeply corrupted the oil trading markets. The level of greed here is amazing. In cases like Iraq, Nigeria and Ecuador the standard practice is for the oil company to pull out 75% of the value of the oil (that is the value as pulled out of the ground). The country gets the other 25%, of which 4/5s is used to pay off World Bank and IMF loans and or be taken by the corrupt elites and moved over to off shore Swiss bank accounts. 5% is left over for the people of that country, but who also inherit many negative environmental and health effects. Then on the other side the investment banks take a huge cut through corrupt lending. It would be interesting to see, of a barrel of oil, how much goes to which groups across the supply chain. The estimate by F. William Engdahl is that roughly 60% of oil prices are pure speculation. This must be added onto the cost of the oil pulled out of the ground, (which must then be transported to its final destination (we will not include the price of refinement as that is the oil company’s job, and therefore their cost)). This is one reason the entire logic for Iraq using its oil resources for reconstruction was so false. The oil companies are taking 75% of the value of the oil and much of the rest is lost to the corrupt elites that the US has installed in Iraq. Therefore the US taxpayer has and will pay for the construction of Iraq, while the major oil companies and Wall Street reap the benefits. This is why it was never the plan to have any Democracy in Iraq.

Coverage on CBS on oil speculation profits.

CBS)  Dan Gilligan of the Petroleum Marketers Association agreed. “Are you saying that companies like Goldman Sachs and Morgan Stanley and Barclays have as much to do with the price of oil going up as Exxon? Or…Shell?” Kroft asked. “Yes,” Gilligan said. “I tease people sometimes that, you know, people say, ‘Well, who’s the largest oil company in America?’ and they’ll always say, ‘Well, Exxon Mobil or Chevron, or BP.’ But I’ll say, ‘No. Morgan Stanley.’” Morgan Stanley isn’t an oil company in the traditional sense of the word – it doesn’t own or control oil wells or refineries, or gas stations. But according to documents filed with the Securities and Exchange Commission, Morgan Stanley is a significant player in the wholesale market through various entities controlled by the corporation. It not only buys and sells the physical product through subsidiaries and companies that it controls, Morgan Stanley has the capacity to store and hold 20 million barrels. For example, some storage tanks in New Haven, Conn. hold Morgan Stanley heating oil bound for homes in New England, where it controls nearly 15 percent of the market. The Wall Street bank Goldman Sachs also has huge stakes in companies that own a refinery in Coffeyville, Kan., and control 43,000 miles of pipeline and more than 150 storage terminals. And analysts at both investment banks contributed to the oil frenzy that drove prices to record highs: Goldman’s top oil analyst predicted last March that the price of a barrel was going to $200; Morgan Stanley predicted $150 a barrel. Both companies declined 60 Minutes’ requests for an interview, but maintain that their oil businesses are completely separate from their trading activities, and that neither influence the independent opinions of their analysts. There is no evidence that either company has done anything illegal. Asked if there is price manipulation going on, Dan Gilligan told Kroft, “I can’t say. And the reason I can’t say it, is because nobody knows. Our federal regulators don’t have access to the data. They don’t know who holds what positions.” “Why don’t they know?” Kroft asked. “Because federal law doesn’t give them the jurisdiction to find out,” Gilligan said. It’s impossible to tell exactly who was buying and selling all those oil contracts because most of the trading is now conducted in secret, with no public scrutiny or government oversight. Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges. (CBS)  “Who was responsible for deregulating the oil future market?” Kroft asked Michael Greenberger. “You’d have to say Enron,” he replied. “This was something they desperately wanted, and they got.” Greenberger, who wanted more regulation while he was at the Commodity Futures Trading Commission, not less, says it all happened when Enron was the seventh largest corporation in the United States. “This was when Enron was riding high. And what Enron wanted, Enron got.” Asked why they wanted a deregulated market in oil futures, Greenberger said, “Because they wanted to establish their own little energy futures exchange through computerized trading. They knew that if they could get this trading engine established without the controls that had been placed on speculators, they would have the ability to drive the price of energy products in any way they wanted to take it.” “When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast,” he added. “Is the same thing going on right now in the oil business?” Kroft asked. “Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street,” Greenberger said. But some of them may now be looking for work. The oil bubble began to deflate early last fall when Congress threatened new regulations and federal agencies announced they were beginning major investigations. It finally popped with the bankruptcy of Lehman Brothers and the near collapse of AIG, who were both heavily invested in the oil markets. With hedge funds and investment houses facing margin calls, the speculators headed for the exits. “From July 15th until the end of November, roughly $70 billion came out of commodities futures from these index funds,” Masters explained. “In fact, gasoline demand went down by roughly five percent over that same period of time. Yet the price of crude oil dropped more than $100 a barrel. It dropped 75 percent.” Asked how he explains that, Masters said, “By looking at investors, that’s the only way you can explain it.” Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money. “The investment banks facilitated it,” Masters said. “You know, they found folks to write papers espousing the benefits of investing in commodities. And then they promoted commodities as a, quote/unquote, ‘asset class.’ Like, you could invest in commodities just like you could in stocks or bonds or anything else, like they were suitable for long-term investment.” http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770_page4.shtml Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York. Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts. A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia. http://www.globalresearch.ca/index.php?context=va&aid=8878 Remember last year.  Oil went from $60 to $150 in the space of a few months.  Why? Because it was no longer profitable to buy CDOs and RMBS, as they were imploding.  The money has to go somewhere, and so traders bet in front of what they believed Bernanke would do – crank down interest rates at an insanely-accelerated rate, which would spike prices in commodities, as the economic slowdown had not yet occurred – and wouldn’t for several months.[1]

[1] The Idiocy of Bernanke’s Bubbles and CNBS