The Enron Connection to $135 Oil

The wealth in America’s tank is fast being siphoned off to our oil suppliers. We’ve been doing this to ourselves for decades, but it’s reaching a crescendo. We are getting poorer.

My old pal Charles Biderman, of TrimTabs, writes:

The US is now broke. The US uses about 21 million barrels per day, at $135 per barrel, annualized that’s $1 trillion, equal to 15.5% of total take-home of everyone who paid taxes of $6.8 trillion. A year ago oil cost 7.7% of take-home pay and didn’t pass 10% until March, after which the US economy really started to break down.

At 15.5% – which doesn’t include the cost of coal or natural gas – the US is broke.

Yet, believe it or not there’s still plenty of oil in the world. What there is a shortage of is those willing to sell oil futures. There are 2.7 million open interest contracts to buy 1,000 barrels of oil globally. One contract is worth $135,000. Yet it costs big investors less than $8,000 (6%) to buy one contract. Small investors need put up all of $10,000.

There is about $2 billion per month going into commodity funds (CTAs). Another $750 million went into commodity ETFs over the past four weeks. If half that money was put to work buying oil (as opposed to other commodities), that would be enough to buy 173,000 contracts, or an amount equal to 6% of the existing open interest, every month.

And that doesn’t include hedge or pension fund buying.

Given how important oil prices are to the US economy, shouldn’t we know who’s buying oil futures? When anyone buys stock, the information is available to the company. Institutional owners have to report what stocks they own. Wouldn’t it be useful to know who the biggest oil futures buyers are? Shouldn’t there be a limit on how many contracts related parties can control?

Then there’s the issue of margin. To buy a stock you have to put up 50%. To buy 1,000 barrels of oil ($135,000) a big investor need put up $8,000 (6%). If margin requirements were raised to 25% the oil market would crack. But margin requirements won’t be raised for one reason: income of the commodity exchanges and traders would plummet.

This is true insanity, watching the world go broke while a handful of oil producing nations – and oil traders – make huge fortunes.

Why don’t oil users fight back? The US has been shoving 70,000 barrels daily into the ground [the Strategic Petroleum Reserve], at $135 per barrel paying $280 million per month for the privilege. [That program will be suspended next month.] How about, instead, selling oil futures? Selling high what it bought low, for a change?

How about if other oil users sold contracts short each month? How about if Japan, airlines, truckers, utilities and any other interested parties banded together to go short oil futures each month until the market went back to reality (covering their shorts at a profit, to boot)?

☞ I take from this a couple of points.

First, that the oil market – like the housing market or tech stock market – could collapse even faster than it ballooned (oil has about doubled in the last year). If oil speculators owning all those futures contracts come to believe the market will turn, they’ll rush to sell – and the market will turn. Say hello to $70 oil. (Which until five minutes ago would have been considered crazy high, and at which level we are still allowing our wealth to be siphoned off . . . but only half as fast as now.)

Second, that a competent Administration (and perhaps one whose leaders were not both oil men) could be doing far more about this – just as the Administration could easily have averted the manipulated California ‘energy crisis’ but chose not to.

To understand the big picture – and its links to Enron and, yes, sorry, to John McCain and his top economic advisors – please watch last night’s eye-opener from MSNBC’s Keith Olbermann.

It takes a while to load, but it’s worth it.

Even at $70 a barrel (or whatever), our oil stocks are worth holding for the long term, because, over the long term, oil prices likely will keep rising as demand from China and India, et al, keeps rising and the planet’s cheap reserves keep dwindling.

But the good news is that, if Charles Biderman and others are right, we actually could see the price fall back significantly for a while, as we race – if we’re smart – to do all we can to become more fuel efficient and less fossil-fuel dependent.