In my recent post "Gentlemen's Agreements" I commented on how the dollar carry trade has been used to speculate up prices of stocks and commodities. Today's news presents yet another perfect example. Philip Davis, on the popular economics blog site "Seeking Alpha," writes about a scam in the commodities trades for oil that he says is 50 times worse than the Bernie Madoff ripoffs. He writes of what the industry calls "Round Trip Trades," using the metaphor of an airline traveler traveling out to a distant location, and then returning again.
"Round-trip” trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. This is nothing more than a massive fraud, pure and simple."
It was revealed that many major trading firms engage in these trades, mostly on unregulated exchanges, and up to 80% of their total trading traffic is comprised of "Round Trip" deals. Since no commodity is ever really traded, (just a contract to buy or sell), the oil trading exchanges have been recording trades that exceed the volume of actual oil delivered many times over...by hundreds of times in fact.
Davis writes: "Over the course of an average month at the NYMEX, 5 BILLION barrels of oil will be traded, with a fee being collected on every single transaction, which is ultimately passed down to US consumers, yet less than 40M barrels will actually be delivered. That is just 8 tenths of 1 percent of actual demand for the product that is being traded - 99.2% of the oil transaction fees being paid by the American people do nothing more than create fees for the traders and record profits and bonuses for the trading firms!" As usual, he claims Goldman Sachs is thick in these bogus trades to drive up commodity prices and rake in the fees, controlling some 60% of the market.
Here is a perfect example of what goes on "behind the scenes" as it were. Most people have no inkling of such doings, and others will simply respond that they don't care about these things, being too concerned with their own immediate lives. Why does such fraudulent speculation matter? Why should it be written about and exposed? Because the price speculation caused by such activities translates directly into pressure on your monthly living expense budget. Davis calculates that before these shadowy trading exchanges got set up to manipulate the price of oil and other commodities higher, the average American spent just 7% of their monthly income on food and fuel. Just a few short years later that number has risen to 20%.
No one talks much about the price of oil these days, which has moved from around $40/barrel earlier in the year to prices near $80, doubling in just a few months time, all while demand has been declining due to the Great Recession, and oil inventories have been rising. Demand down, supplies up...That usually translates to lower prices. Not this time, however. The price doubled instead, and now you know why. The fat cats on Wall Street have just been logging scads of round trip trades, batting the price back and forth like a ping-pong game. It's kept the price of oil artificially inflated, and you've been paying for it each time you fill up at the pump.
Most people will agree that the simple necessities of life cost much more now. This is why, and this is also why writing about it matters, because in the end we all pay for the shenanigans of the Wall Street Wizards and their trading schemes. Quite literally. The world is full of deception and fraud. Can I change the world with a blog post? No, but telling the truth about it matters, at least to me.
"Round-trip” trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. This is nothing more than a massive fraud, pure and simple."
It was revealed that many major trading firms engage in these trades, mostly on unregulated exchanges, and up to 80% of their total trading traffic is comprised of "Round Trip" deals. Since no commodity is ever really traded, (just a contract to buy or sell), the oil trading exchanges have been recording trades that exceed the volume of actual oil delivered many times over...by hundreds of times in fact.
Davis writes: "Over the course of an average month at the NYMEX, 5 BILLION barrels of oil will be traded, with a fee being collected on every single transaction, which is ultimately passed down to US consumers, yet less than 40M barrels will actually be delivered. That is just 8 tenths of 1 percent of actual demand for the product that is being traded - 99.2% of the oil transaction fees being paid by the American people do nothing more than create fees for the traders and record profits and bonuses for the trading firms!" As usual, he claims Goldman Sachs is thick in these bogus trades to drive up commodity prices and rake in the fees, controlling some 60% of the market.
Here is a perfect example of what goes on "behind the scenes" as it were. Most people have no inkling of such doings, and others will simply respond that they don't care about these things, being too concerned with their own immediate lives. Why does such fraudulent speculation matter? Why should it be written about and exposed? Because the price speculation caused by such activities translates directly into pressure on your monthly living expense budget. Davis calculates that before these shadowy trading exchanges got set up to manipulate the price of oil and other commodities higher, the average American spent just 7% of their monthly income on food and fuel. Just a few short years later that number has risen to 20%.
No one talks much about the price of oil these days, which has moved from around $40/barrel earlier in the year to prices near $80, doubling in just a few months time, all while demand has been declining due to the Great Recession, and oil inventories have been rising. Demand down, supplies up...That usually translates to lower prices. Not this time, however. The price doubled instead, and now you know why. The fat cats on Wall Street have just been logging scads of round trip trades, batting the price back and forth like a ping-pong game. It's kept the price of oil artificially inflated, and you've been paying for it each time you fill up at the pump.
Most people will agree that the simple necessities of life cost much more now. This is why, and this is also why writing about it matters, because in the end we all pay for the shenanigans of the Wall Street Wizards and their trading schemes. Quite literally. The world is full of deception and fraud. Can I change the world with a blog post? No, but telling the truth about it matters, at least to me.
