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$4 per gallon gasoline in WI, contango and Koch

April 14th, 2011 1:30 am CT

Gregory Patin

Madison Independent Examiner


Gasoline prices in Madison and around the country have increased to nearly $4.00 per gallon – the highest price for consumers since the summer of 2008. So-called analysts in corporate media blame the increase on free market fundamentals relating to supply and demand, such as OPEC policies, the unrest in Libya and increased demand in China and India.

The truth is that market fundamentals are not driving gasoline prices up. Libya produces about 2 percent of the world’s oil and only 5 percent of that goes to U.S. companies. Furthermore, oil production is at a record high, with an adequate supply of crude to meet global demands.

Commodity Futures Trading Commission (CFTC) commissioner Bart Chilton recently explained that rampant oil speculation, which is at its highest level on record in 2011, is to blame for current prices.

A commodity market is said to be in “contango” when demand is expected to outstrip supply and future prices are expected to rise. Big banks and companies like Koch employ a contango strategy by buying up oil and storing it in massive containers both on land and offshore to lock in the oil for sale later at a set price. Sort of like the Wal-Mart of Wall Street.

What most people do not know, however, is that Koch Industries occupies a unique role in manipulating the oil market and is one of the top five largest distributors of gasoline and oil that engages in the practice. Koch Industries, unlike well-known oil companies, has little involvement in the extraction process of procuring crude oil. Instead, the conglomerate focuses on shipping crude oil, refining it, speculating on the future price, and then distributing it to retailers.

In 2008, David Chang from Koch Industries drew attention among clients by bragging that falling crude prices in 2008 provided an opportunity to remove oil from the market for future delivery. He said:

The drop in crude oil prices from more than US $145 per barrel in July 2008 to less than US $35 per barrel in December 2008 has presented opportunities for companies such as ours. In the physical business, purchases of crude oil from producers and storing offshore in tankers allow us to benefit from the contango market where crude prices are higher for future delivery than for prompt delivery.

Koch Industries, like Enron, created a number of derivatives in order to leverage its privileged position in the energy industry. With control of every part of the market, the Koch brothers are not only able to bet on future oil and gasoline prices with privileged information, but also are able to procure and withhold enough supply from the market to influence the future price.

In December of 2008, Koch Industries leased “four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead.” Writing about Koch’s contango efforts to artificially drive down supply back then, Fortune magazine writer Jon Birger noted they could be raising “gasoline prices by anywhere from 20 to 40 cents a gallon” at the time. Prices went up far more than that in recent months.

The American public knows very little about the oil speculation industry because our corporate media tells next to nothing about it and because a conservative majority on the CFTC has refused to implement a mandate from the Dodd-Frank Wall Street reform bill to provide more transparency.

Meanwhile, Republicans are pushing drastic budget cuts to the CFTC and the Securities and Exchange Commission (SEC), thereby hampering any new regulations on oil commodity speculation. Watch for these agencies to be targeted on the list of budget cuts in the coming months.

A recent presentation from Koch Supply & Trading, the Koch unit devoted to selling financial products, confirms that Koch has taken advantage of a lax regulatory environment to aggressively trade on future oil prices. “The return of speculators to Oil, the ‘macro trade’ is alive and well,” reads slide 36. The entire presentation can be viewed on slide share here: Koch Supply & Trading Risk Management.

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