He called on the government to stop filling the strategic petroleum reserve out of the commercial market; to release fuel from the Northeast Home heating oil reserve; and, most important, investigate the speculators.

"There is a significant disconnect between the paper market for oil (speculators) and the physical market for oil (consumers)," May said.  "The volume of speculative activity in March 2008 was 13.5 times greater than the volume of oil actually consumed."  

 
Day late, dollar short, oil long
The price of crude oil is no longer tied to a traditional relation of supply to demand, nor is it regulated the way business owners and consumers believe it to be.  The Financial Times of London recently reported that Lehman Brothers estimated speculation has driven the price of oil by 30 percent. Maybe, however, half or more of today's crude oil price results from speculation driven by large trader banks and hedge funds.

Exorbitant gas and oil prices cause obvious problems in the overall economy.  Specific industries, such as the auto parts and service industry, are directly impacted by increasing fuel prices resulting in, for instance, fewer miles driven.  Long-range effects include calls for increased CAFE standards, leading to more over-engineered vehicles, and movements away from the traditional and recreational role of the motor vehicle.

Perhaps our various associations in the automotive parts and service industry should consider joining with other related industries to make a similar call to action as has May and the Air Transport Association.

Unregulated speculation
F. William Engdahl reported on May 2, 2008, at www.globalresearch.ca ("Perhaps 60 percent of today's oil price is pure speculation") that "with the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices."  That's especially true since 2006.

A June 2006 U.S. Senate Permanent Subcommittee on Investigations report, "The Role of Market Speculation in rising oil and gas prices," noted that "there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices." 

Although generally ignored by media and Congress, the report states, "The Commodity Futures Trading Commission (CFTC), a financial futures regulator, was mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation."

 
The U.S. Commodity Exchange Act (CEA) states, "Excessive speculation in any commodity under contracts of sale of such commodity for future delivery…causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity - is an undue and unnecessary burden on interstate commerce in such commodity." 

 
And the CEA directs the CFTC to establish such trading limits "as the commission finds are necessary to diminish, eliminate, or prevent such burden."  The CFTC, regarding its mandated oversight responsibilities in the most important of traded commodities, oil, needs to take action.

The same Senate report noted, "Until recently, U.S. energy futures were traded exclusively on regulated exchanges within the U.S., like NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud."

The report also notes, "The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted, at the behest of Enron and other large energy traders, into the Commodity Futures Modernization Act in 2000 in the final days of the 106th Congress."  The impact on market oversight has been substantial.

It continues, "In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Larger Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight.  In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts at the end of each day."

In 1999, the London Exchange obtained the CFTC's permission to install computer terminals in the United States to permit traders in New York and other U.S. cities to trade European energy commodities through the Intercontinental Exchange (ICE).  Then in January 2006, ICE Futures began trading futures for West Texas Intermediate (WTI) crude oil, the type of crude produced and delivered in the United States.

 
"At that point, investors within the U.S. seeking to trade key U.S. energy commodities--crude oil, gasoline, and heating oil--were able to avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York," Engdahl said.

A look at the price for North Sea Brent (European) and WTI (American) futures prices since January 2006 indicates an eye-opening correlation between surging oil prices and the unregulated trade in ICE oil futures in U.S. markets.  In January 2006, when the CFTC allowed the ICE Futures the exception, oil prices were trading in the range of $60 a barrel.  In June 2006, the Senate investigation estimated that $25 of that $60 was due to financial speculation.  Today, just two years later, oil prices reach and surpass $120 per barrel and trend upwards.  "This is not an OPEC problem but a U.S. regulatory problem of malign neglect," Engdahl said.

The Senate report stated, "The CFTC's ability to detect and deter price manipulation is suffering from critical information gaps because traders on OTC electronic exchanges and London ICE futures are currently exempt from CFTC reporting requirements."  

 
Recent run-up
During the recent run-up to $120+ a barrel, large financial institutions, hedge funds, and other funds and investors have been pouring billions of dollars into the energy commodities markets to take advantage of price changes.

Although product demand has increased over the past few years, so has supply.  The U.S. Department of Energy's Information Administration (EIA) recently forecast that in the next few years, global surplus production capacity will continue to grow to between 3 million and 5 million barrels a day by 2010, thereby "substantially thickening the surplus capacity cushion."

"A common speculation strategy amid a declining U.S. economy and a falling dollar is for speculators and ordinary investment funds desperate for more profitable investments amidst the U.S. securitization disaster, to take future positions selling the dollar short and oil long," Engdahl said.

For large investment banks and various funds desperate for profits following the collapse in earnings since August 2007 and the U.S. real estate "sub-prime" crisis, oil is one of the best ways to achieve huge speculative gains.  While the Federal Reserve has released about $400 billion through the "repo" discount window to assist the investment banks to solve the real estate and credit crisis, perhaps it is bankrolling 20+ percent profits on 2 percent money to salvage insolvent bank balance sheets. 

First, unregulated financial adventurism leads to a credit/derivative meltdown in the financial market, then the U.S. Treasury is used to bail out investment banks, and now we all pay the price of speculator-driven commodity prices, especially oil, so the culprits can gain 20 percent profits.  What's next, a "pump-and-dump" commodity strategy similar to the dot-coms?

Call for investigations
Perhaps, indeed, it is time for all automotive-related and small-business associations to speak out and call for an investigation as the Air Transport Association is doing.