There is nothing new under the sun. Manifestations may differ in scale and detail, but underneath it’s just a repeat performance of the same old song. We are witnessing this now with the oil price scandal, where traditional theories of supply and demand have been suspended.
The economic model has been interrupted and disfigured by speculation and greed on a scale so mind-numbing that it simply cannot be accommodated. It may not be against the law – but the conspiratorially contrived increase in oil prices, wholly unrelated to the supply of the commodity itself, is a fraud however labeled, and perpetrated on populations all over the world.
Some 30 years ago I wrote a series of articles in this magazine on great frauds, including the fabulous “salad oil swindle”, which rested on the fabrication of paper appearances devoid of substance. The instruments in question were “warehouse certificates” issued by American Express, who had established a “field warehouse” over huge tanks of vegetable oil in New Jersey, operated by the evil genius who owned them, one Tino de Angelis.
During stocktaking oil was pumped from tank to tank by Tino’s henchmen ahead of the Amex inspections so that actual quantities could never be measured. Yet the certificates were recognized negotiable instruments in their own right. They were traded on the Chicago exchanges at prices driven higher and higher by Tino’s insiders in a frenzy of speculation based on fabricated book quantities.
Taps on the largest tanks were opened and sea water poured out for 12 days
It was only when the commodity exchange refused to accept warehouse certificates in lieu of margin calls that the charade collapsed. Taps on the largest tanks were opened and sea water poured out for 12 days. The book stocks of Tino’s oil showed volumes that exceeded the total amount of edible oil in the entire USA. Yet such was the fever that no one noticed.
The Equity Funding scandal, of similar vintage, involved the fabrication of life insurance policies on non-existent people and the subsequent sale of those policies to other life companies, which duly paid Equity Funding large capital sums on the “deaths” of the fictional insureds.
Although the fraud’s architects aimed to dilute its impact through paper-for-paper acquisitions, its scale escalated out of control. Indeed, extrapolations projected by its own computer showed that 5 years hence the number of policies in force would exceed the population of the USA.
Markets controlled by speculators
It matters not whether the fraudulent instruments are warehouse certificates, life policies, parcels of sub-prime mortgages or oil futures contracts. Nor whether, as in Tino’s case, the underlying commodities actually exist or, as with oil today, there is an alleged shortage. What matters in all cases is that speculators effectively hijack the market with avariciously priced trades so voluminous that they become self-fulfilling. Contact with the real world is severed.
These unregulated, parasitical trades have no useful economic role; they are mere features of a professional gambling ring. The good old commodity exchanges of Al Capone’s home town are host to over 1 million trades every day – and have already reached close to last year’s total!
The favourite myth is that high oil prices relate to supply risks caused by phenomenal demand from China and India. Or hurricanes heading for Mexican rigs. Or power failures in Iraq. Or pipelines blown up in Nigeria. Or that the world’s supplies are on the wane.
Not so, any of it. It pays hedge fund speculators to stoke the scare-stories to justify the prices. But BP’s experts, and those of other major producers, insist that 4 trillion barrels are ready for extraction, and many trillions more lie in the untapped Arctic and across the Atlantic. The truth is that there is no oil shortage. There are no queues at the pumps; no tankers lying at anchor in the Gulf, waiting for oil.
Like every bubble, this one will burst and prices will again be governed by markets. But today a trader can buy a million-dollar futures contract by pledging a 10% margin of $100,000. Five minutes later the oil price rises by one dollar he has made a million dollars. Only a significant raising of margin requirements will bring the risks of these absurd trades into line with the rewards. For once, regulation is the answer.