gGasoline prices at the pump jumped, hitting a US national average of $4.34 on March 21, and remain more than 70% higher than the same time last year. At the same time, the global oil supply have actually increasedincluding from Russia, even in the midst of the war in Ukraine.
So if high prices aren’t driven by scarcity, what?
Experts warn that low-profile energy traders, most of whom work for the world’s biggest oil companies, banks and private trading firms, are partly to blame.
The amount of trading – and the profits associated with it – have skyrocketed, reaching record highs in 2021 and 2022. This poorly regulated activity is hitting the pockets of Americans and represents a “market emergency,” according to Michael Greenberger, a former US government. trade regulator.
“My instinct tells me that a very careful analysis of this market would show that the price does not reflect supply chain issues, that there is simply too much wiggle room for the big banks and the big producers can manipulate if no one is watching and monitoring what they are doing,” says Greenberger, the former division director of the Commodity Futures Trading Commission (CFTC), the main regulator of energy markets in the United States.
“No one in power watches what he does,” he says. “There’s no cop on the beat.”
Veteran oil analyst Philip K Verleger has warned that supply and demand “fundamentals have become almost irrelevant” to oil prices, a key determinant of the price of gasoline at the pump.
He pointed to a dramatic increase in speculation driven by AIs rapidly buying and selling massive energy bets based on minor, if any, changes to actual supplies. “Under these circumstances, a change of [supply and demand] fundamentals that could have moved prices 50¢ or $1” will drive a change of up to $10 a barrel of oil, he wrote.
Overall, global oil production is almost 5 million barrels per day higher in 2022 than in 2021, but US politicians on both sides of the aisle have called for even more drilling. Russia’s oil exports to the world market have not been hampered by war or sanctions. Instead, they are rising and should end April higher than at any time since before the Covid pandemic, according to research firm Kpler.
“The crude is loaded onto ships and shipped. Which I think is the story right now,” Reid L’Anson, senior commodities economist at Kpler, told The Guardian.
There are certainly other factors that are putting upward pressure on prices, including the fear that Russian supply may decrease in the future. But the price of oil, natural gas and other vital fossil fuels today is mostly set by energy traders, whose actions are fueling higher prices and volatility.
In fact, little physical oil changes hands with such trading, which takes place on two major exchanges in the United States, CME Group and the Intercontinental Exchange. Instead, the trade is in futures contracts, a commitment to buy a specified amount of oil in the future at an agreed price in the present. But because virtual trade has come to eclipse physical trade, it now determines the price of oil.
Greenberger estimates that “something like 13 times the physical amount of oil is traded” via these purely financial contracts. And trading – those based on the actual use of oil – has been pushed back, he says, replaced almost entirely by speculators looking to make a quick buck, which in turn increases excessive speculation and volatility. .
According to data provided to The Guardian by CME Group, the amount of crude oil futures traded daily on its platform increased in 2022 compared to 2021, and is almost double that of a decade ago.
Rising prices and volatility have been visible since the day before Russian troops entered the war against Ukraine, when the price of a barrel of oil was 90 dollars. Since the invasion, despite no change in supply, it has jumped to $124, fallen to $95, recovered to $114, before falling back to $103 a barrel today, more than 60% more than a year ago.
All major oil companies, major US banks and lesser-known private trading houses, led by Vitol, Trafigura, Mercuria and Glencore, are involved in speculative energy trading. Some have even been guilty illegal trade over the years. But determining their exact level of involvement is not easy, as there are few reporting requirements allowing the public to enter this largely opaque world.
In a 2020 profit call with analysts, Shell CEO Ben van Beurden called Shell trading “key to the success of our business, it actually does the magic in many cases”. Shell typically earns up to $4 billion a year from this trade.
“We are seeing massive volatility, in terms of trading activity, in terms of price, where you have big bounces between prices, and so something is not right,” says Tyson Slocum, director of the Public Citizen’s Energy Program, a non-profit consumer advocacy organization. Slocum, who also sits on the CFTC’s Energy and Environmental Markets Advisory Committee, calls for greater regulation and transparency in a broken system where “speculators are allowed to rule freely.”
The CFTC itself has been weakened by Trump and crippled by vacancies under Biden, who left the majority of committee seats empty until late last month.
Slocum argues that the federal government has ceded too much authority to futures exchanges. With profits based on trading volume, they have few incentives to rule over traders, including excessive speculation, he alleges.
Asked to respond to the allegations, CME Group and Intercontinental Exchange declined to comment.
There are signs that policymakers are beginning to take notice. Democratic Senators Maria Cantwell and Amy Klobuchar led a Commerce Committee hearing earlier this month into potential manipulation of oil markets. Congressman Ro Khanna told the Guardian he supports reforms to curb excessive speculation and strengthen enforcement with the ultimate goal of switching to renewables.
Tyson Slocum agrees. The constant volatility and rising prices of oil and natural gas at the hands of energy traders are generating huge profits for a few, but hardship for most. It’s “a wake-up call that we need to aggressively get rid of fossil fuels,” he says. “What happens in [futures] markets is in fact neither constructive nor useful for a clean energy transition.