A different kind of carbon trading tax

Speculators argue that they do not affect oil prices — we are paying more at the pump, and businesses far more to make their products, because this is the natural state of things: Oil supplies are static while demand is rising, so next year we will be back to the ultra-tight market of 2008, when ...

Ethan Miller/Getty Images
Ethan Miller/Getty Images
Ethan Miller/Getty Images

Speculators argue that they do not affect oil prices -- we are paying more at the pump, and businesses far more to make their products, because this is the natural state of things: Oil supplies are static while demand is rising, so next year we will be back to the ultra-tight market of 2008, when oil prices sky-rocketed to $147 a barrel. In fact, Goldman Sachs says that is precisely where we are headed -- an average of $140 a barrel next year, the bank said in a note to clients this week.

These are geopolitical prices -- such levels weigh heavily on the economies of oil-consuming nations, such as the United States and Europe, and make producers such as Russia and the OPEC nations fat and mean.

Only, is the Goldman Sachs account of reality true? Let’s start with the 2008 runup -- yesterday, the Commodity Futures Trading Commission charged Parnon Energy, a big U.S. trading house, and two of its European affiliates with oil price manipulation. They bought up and stored a huge percentage of the available oil in Cushing, Oklahoma, in January and March 2008 with the aim of cashing in when the market perceived a drastic shortage of crude, the CFTC alleges. During the whole of these events, Goldman Sachs and other investment banks -- attempting to stave off tighter regulation -- paraded repeatedly before CFTC hearings, congressional committees and public cameras claiming that such activity was almost impossible. The surge was a reflection of fundamentals, and traders were innocent of any impact, they testified. Were they correct? Not if the CFTC case is accurate.

Speculators argue that they do not affect oil prices — we are paying more at the pump, and businesses far more to make their products, because this is the natural state of things: Oil supplies are static while demand is rising, so next year we will be back to the ultra-tight market of 2008, when oil prices sky-rocketed to $147 a barrel. In fact, Goldman Sachs says that is precisely where we are headed — an average of $140 a barrel next year, the bank said in a note to clients this week.

These are geopolitical prices — such levels weigh heavily on the economies of oil-consuming nations, such as the United States and Europe, and make producers such as Russia and the OPEC nations fat and mean.

Only, is the Goldman Sachs account of reality true? Let’s start with the 2008 runup — yesterday, the Commodity Futures Trading Commission charged Parnon Energy, a big U.S. trading house, and two of its European affiliates with oil price manipulation. They bought up and stored a huge percentage of the available oil in Cushing, Oklahoma, in January and March 2008 with the aim of cashing in when the market perceived a drastic shortage of crude, the CFTC alleges. During the whole of these events, Goldman Sachs and other investment banks — attempting to stave off tighter regulation — paraded repeatedly before CFTC hearings, congressional committees and public cameras claiming that such activity was almost impossible. The surge was a reflection of fundamentals, and traders were innocent of any impact, they testified. Were they correct? Not if the CFTC case is accurate.

Let’s look at the bigger picture. Spare capacity is an indisputable fundamental factor in oil prices, but it is only what gets the whooping-and-cheering Goldman Sachs, Morgan Stanley and their clients to the casino table. Once they are there, they are standing alongside traditional traders, and pouring their extremely high net worth into the same pot. It’s that piling up of the cash on the table that pumps air into the oil price. Should we ignore that pile while the investment banks divert our attention to the nice flowers and pretty birds? No, we shouldn’t.

Among those puzzled about the Goldman Sachs-Morgan Stanley call is Peter Buetel, a hedge fund adviser. In a note to his clients, Buetel raises the other major factor behind the fabulous three-year run-up in prices — government spending. Buetel is among those who frequently remind us that oil prices are also being considerably pumped up by trillions of dollars poured into the global system by government treasuries and central banks, notably those of the United States, attempting to prop up the wobbly global economy. Next month, the U.S. Federal Reserve is ending its latest round of this economy-ginning practice. Hence, say Buetel and other analysts, the air is bound to go out of oil prices. “It makes us very suspicious when these big, well-connected investment banks tell us to buy something when it makes no sense,” Buetel wrote Tuesday evening.

In fact, Beutel seems hopping mad. He thinks that either these investment banks have been tipped off to a coming new round of Federal Reserve stimulation — which most people have written off since the U.S. public would probably rip off the head of any leader who suggested it — or are simply attempting to find buyers for their long positions in futures. He wrote:

For two companies who effectively led the global movement to buy oil as an asset class, based on fears of inflation and a weak U.S. dollar, to couch their bullish sentiments in the language of fundamental analysis is almost a slap in the face to fundamental supply and demand-influenced traders. If they are really bullish instead of trying to shake out buying they can sell into, then they learned something from the Fed, something it plans to do that will suddenly make oil attractive again as an asset class. These guys really don’t care about the fundamentals, or have not cared about them for nearly five years. They either know something we don’t (from the Fed or Treasury) or are trying to get others to buy because they are already long (we must assume they are fully long for them to announce their revised forecasts). It could be both.

Solution? A new carbon tax: Do nothing to prevent Goldman, Morgan Stanley and their clients to jolly it up in the casino. But tax their winnings sharply. Why? Isn’t it their just due for the public good they are providing, not to mention their job-creating risk? No, it’s not.

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

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