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Is the energy-fraud cop back on the beat?

ASK THIS | April 30, 2011

Does the Justice Department's new oil and gas fraud task force mean business? Because if it does, says Prof. Michael Greenberger, that alone could dampen speculation and start bringing oil and gas prices down.

Attorney General Eric Holder announced on April 21 the formation of a new working group within the department’s Financial Fraud Enforcement Task Force to focus on fraud in the energy markets. The group holds its first meeting on May 2.

Michael Greenberger, a professor at the University of Maryland School of Law, previously served as a principal deputy associate attorney general and former director for trading and markets at the Commodity Futures Trading Commission. Here’s the lightly edited transcript of what Greenberger told reporters in a conference call hosted by the Center for American Progress on Thursday.

Ever since May of 2008, when we had the last bubble in oil prices and gasoline -- in July of 2008, the price hit $147.17 per barrel of oil, which was a world record, and gas prices were the same rate they are today -- there has been evidence that has swamped Congress demonstrating that speculation in the price of oil -- betting on the upward direction of the price -- sends a false demand signal to the market and has a substantial impact on the upward price of oil and the upward price of the principle derivative, gasoline.

This year at the end of March, in response to the CFTC’s proposed implementation of the Dodd-Frank bill, the CFTC was swamped with 11,000 comments, the overwhelming majority of which were from end-users -- like airlines, truckers, heating oil dealers, petroleum marketers, farmers, consumers, the AARP, public interest groups, Public Citizen -- citing the many studies that demonstrate that widespread gambling on the upward direction of crude oil, and for that matter agricultural commodities as well, is a prime factor in the inflationary cycle we’re re-experiencing now in the price of crude oil, gasoline and farm products.

The most important signal that was sent two weeks ago was Goldman Sachs, which offers one of the principal investments on the upward direction of prices in commodities, itself said that the market is now swamped with excessive speculation, and estimated that $25 to $30 of the price of a barrel of oil is due to excessive speculation in these markets. That converts to about 75 cents per gallon of gasoline.

The president, during that same period about two weeks ago, announced his conclusion that speculation was driving these markets. He appointed a task force headed by the Justice Department -- to be aided by the Federal Trade Commission, the Commodity Futures Trading Commission, the SEC, the Department of Energy and the Department of Agriculture -- to investigate fraud and manipulation in these markets.

People with experience in these markets, whether they’re businesses, or market observers, or the vast majority of academics, believe that not only is the market awash with speculation that has its own impact without criminal intent, but there is fraud and manipulation in these markets that’s akin to the kind of conduct Enron used in 1999 to 2001 to drive the price of electricity on the West Coast.

It’s very important that the Justice Department-led working group vigorously investigate these markets. Moreover, the CFTC has the power, pursuant to Dodd-Frank, to limit speculation not for any criminal reason but just when they realize that the markets are becoming unstable because of the excessive speculation.

In fact, January 26, 2011, is a very important date here, because on that date, the CFTC proposed a rule that was not only weak in terms of limiting speculation but clearly did not have the support of the majority of the commissioners on the CFTC. One Democratic commissioner and two Republican commissioners either voted outright against the proposed rule, or said if the proposed rule came back in the same form, they would not support it. (See transcript of that meeting.)

That day is very important, because when you look at that day, that’s the day that oil started to make its dramatic increase. That was the demonstration by the CFTC that they would not implement strict mandates of Dodd-Frank. And speculators were told there’s no cop on the beat.

It’s very, very important that the Justice Department lead a vigorous investigation of these markets, that the CFTC commissioners get three votes to impose strong limits on speculation, and that the funding for all these agencies, which is in jeopardy, be sustained, so that we have the kind of enforcement power to ensure that these markets are fair and reflect price-demand fundamentals.

If the cop comes on the beat is the surest way to quickly reduce the price, not only of oil and gasoline, but of farm products as well.

I would like to see the Justice Department convening a meeting at the Justice Department and having the enforcement chiefs of the FTC, CFTC, SEC, Department of Energy, Department of Agriculture, walk into that building with the FBI. If there are signals sent that the Justice Department is going to be serious about this, I think the same kind of conduct that led to the electricity crisis on the West Coast in 1999-2001, and led to the last bubble in crude oil, would start dissipating immediately. If this is just a political ploy, and not a real investigation, then it’s going to have no impact.

If I were a reporter on this, I would be calling the Justice Department and saying: when is this working group meeting, how serious are you about this, who’s involved?

People who know these markets, have businesses in these markets, airlines, truckers, heating oil dealers, petroleum marketers, farmers are very much convinced that these markets -- given that they’re awash in supply -- are acting in an extremely peculiar fashion. Hershey’s chocolate said if these markets can’t be fixed, they should be shut down.

Hopefully the president and the attorney general are serious about this investigation. I think just a sign that there will be investigators -- the FBI and the enforcement divisions, people from all over the agencies will be hard at work -- will have a dampening effect on speculation and will start bringing the price down.

I also have a high degree of certainty that within six months or a year, indictments can be handed down and that will really pull the bottom out of the speculative fever, and the price will go back down to the band it was in from the spring of 2009 to January of this year, of $75 to $85.

Posted by soreloser
04/30/2011, 07:04 PM

Until oil/gas speculation is addressed, no jobs or housing recovery.

Intercontinental Exchange
Posted by Earl Richards
04/30/2011, 07:38 PM


Intercontinental Exchange
Posted by Earl Richards
04/30/2011, 07:49 PM

The high gasoline prices are caused by the fraudulent "round-trip" trades of the "dark pool" trading in the Intercontinental Exchange (ICE) in Atlanta. The international Big Oil/big banking cabal owns ICE. ICE operates outside of U.S. law. The Commodities Futures Trading Commission does not have any jurisdiction over ICE. ICE's energy traders and speculators can ratchet-up the oil price any time they feel like it, and for any excuse, on behalf of themselves and on the behalf of Big Oil, through the use of "round-trip" trades. Google the "Global Oil Scam". ICE is a super Enron. Oil is too critical a resource to be controlled by greedy traders, greedy speculators and greedy corporations. If the Oil and Gas Price Fraud Working Group does not investigate ICE, then, it is a waste of time and taxpayers' dollars.

Justice Dept. is a joke
Posted by A Citizen
05/03/2011, 08:41 AM

There is no one at the Justice Dept. or there would be Bank CEO's in jail by now. I can not believe anyone with a brain thinks that sending the problem of oil prices to the Justice Dept. to look for "fraud" is taking on the problem. THERE IS NO FRAUD, everything is perfectly legal.

Close the Goldman Sachs loophole.

Close the Enron loophole

Close the London loophole.

How many times do I have to repeat myself to contributors to this forum.

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