The Contango Game: How Koch Industries manipulates the oil market for profit
by Lee Fang, Wonk Room, Think Progress, April 13, 2011
In recent weeks, gas prices around the country have surged to levels unseen since the 2008 oil spike. However, market fundamentals are not driving the nearly $4.00/gallon gas prices. In fact, under the Obama administration, oil production is at record highs and there is adequate global supply of crude. As Commodity Futures Trading Commission (CFTC) commissioner Bart Chilton has explained, rampant oil speculation, which is at its highest level on record right now, is to blame for current prices.
Currently, the public knows very little about the oil speculation industry because aconservative majority on the CFTC has refused to implement a mandate from the Dodd-Frank Wall Street reform bill to curb abuses. Meanwhile, Republicans are pushing steep cuts to the CFTC, hampering any new rules on oil speculation that may be released later this summer. Fortunately, both the Securities and Exchange Commission and the CFTC have so far survived the latest round of budget cuts.
While much of the attention on oil speculators has rested on the backs of investors and commodity traders, the petrochemical conglomerate Koch Industries occupies a unique role in manipulating the oil market. Koch has little business in the extraction process. Instead, Koch focuses on shipping crude oil, refining it, distributing it to retailers — then speculating on the future price. With control of every part of the market, Koch is able to bet on future prices with superior information. As Yasha Levine notes, Koch, along with Enron, pioneered a number of complex financial products to leverage its privileged position in the energy industry.
In 2008, Koch called attention to itself for “contango” oil market manipulation. A commodity market is said to be in contango when future prices are expected to rise, that is, when demand is expected to outstrip supply. Big banks and companies like Koch employ a contango strategy by buying up oil and storing it in massive containers both on land and offshore to lock in the oil for sale later at a set price. In December of 2008, Koch leased “four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead.” Writing about Koch’s contango efforts to artificially drive down supply, Fortune magazine writer Jon Birger noted they could be raising “gasoline prices by anywhere from 20 to 40 cents a gallon” at the time. Speaking with the Business Times, Koch executive David Chang even boasted that falling crude prices in 2008 provided an opportunity to remove oil from the market for future delivery:
CHANG: The drop in crude oil prices from more than US$145 per barrel in July 2008 to less than US$35 per barrel in December 2008 has presented opportunities for companies such as ours. In the physical business, purchases of crude oil from producers and storing offshore in tankers allow us to benefit from the contango market where crude prices are higher for future delivery than for prompt delivery.
A recent presentation from Koch Supply & Trading, the Koch unit devoted to selling financial products, confirms that Koch has taken advantage of a lax regulatory environment to aggressively trade on future oil prices. “The return of speculators to Oil, the ‘macro trade’ is alive and well,” reads slide 36:
The slideshow, given to an industry association for oil speculators, describes Koch as the “world’s top five crude oil traders and actively trades about 50 types of crude oil around the world.” Notably, Koch “has trading operations in London, Geneva, Singapore, Houston, New York, Wichita, Rotterdam, and Mumbai.”
As a recent Center for Public Integrity report uncovered, Koch lobbied aggressively against Obama’s financial reform bill, particularly on provisions related to transparency in the energy trading market. Is Koch again buying up supply in expectation of higher crude prices during the summer or beyond — as many analysts have predicted? No one knows, especially when the energy speculation and trading industry currently operates with virtually no regulation.
UPDATETo learn more about GOP and industry efforts to undercut efforts to regulate oil speculators, the Wonk Room's Pat Garofalo and Brad Johnson have broken down some of the issues involved.
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