Chapters 1 through 3 showed how energy market leaders Goldman Sachs, JP Morgan and others, have manipulated the system by creating loopholes that allow for "legal" insider trading to increase the cost of oil and over-inflate their profits.
From those successes they are expanding their greed for wealth by buying "physical oil" consisting of pipelines, refineries and other infrastructure, giving them a once illegal "peep-preview" edge in the market to further their manipulation of the system and to continue gouging the American people.
Latest Trading Trick: Energy Infrastructure Affiliate Abuses
Permission to re-print by :
Tyson Slocum, Director
Public Citizen’s Energy Program
Energy traders like Goldman Sachs are investing and acquiring energy infrastructure assets because controlling pipelines and storage facilities affords their energy trading affiliates an "insider’s peek" into the physical movements of energy products unavailable to other energy traders. Armed with this non-public data, a company like Goldman Sachs most certainly will open lines of communication between the affiliates operating pipelines and the affiliates making large bets on energy futures markets. Without strong firewalls prohibiting such communications, consumers would be susceptible to price gouging by energy trading affiliates.
For example, In January 2007, Highbridge Capital Management , a hedge fund controlled by JP Morgan Chase, bought a stake in an energy unit of Louis Dreyfus Group to expand its oil and natural gas trading. Glenn Dubin, co-founder of Highbridge, said that owning physical energy assets like pipelines and storage facilities was crucial to investing in the business: "That gives you a very important information advantage. You're not just screen trading financial products."
Indeed, such an "information advantage" played a key role in allowing BP’s energy traders to manipulate the entire U.S. propane market. In June 2006, the CFTC filed a civil complaint against BP, alleging that the company’s energy trading affiliate used the company’s huge control over transportation and storage to allow the energy trading affiliate to exploit information about energy moving through BP’s infrastructure to manipulate the market.
BP’s energy trading division, North America Gas & Power (NAGP), was actively communicating with the company’s Natural Gas Liquids Business Unit (NGLBU), which handled the physical production, pipeline transportation and retail sales of propane. A Powerpoint exhibit to the civil complaint against BP details how the two divisions coordinated their manipulation strategy, which includes "assurance that [the] trading team has access to all information and optionality within [all of BP]…that can be used to increase chance of success [of market manipulation]… Implement weekly meetings with Marketing & Logistics to review trading positions and share opportunities."
This shows that the energy traders were actively engaging the physical infrastructure affiliates in an effort to glean information helpful for market manipulation strategies. And it is important to note that BP’s market manipulation strategy was extremely aggressive and blatant, and regulators were tipped off to it by an internal whistle blower. A more subtle manipulation effort could easily evade detection by federal regulators, making it all the more important to establish firewalls between energy assets affiliates and energy trading affiliates to prevent any undue communication between the units.
The Wall Street Journal reported that the government investigation goes beyond manipulation of propane: "investigators are examining, among other things, whether BP used information about its own pipelines and storage tanks at a key oil-delivery point in Cushing, Okla., to influence crude-oil price benchmarks that are set each day and influence billions of dollars of transactions."
Financial firms like hedge funds and investment banks that normally wouldn’t bother purchasing low-profit investments like oil and gasoline storage have been snapping up ownership and/or leasing rights to these facilities mainly for the wealth of information that controlling energy infrastructure assets provides to help one’s energy traders manipulate trading markets. For example, according to The Trader Monthly, just one Morgan Stanley trader was able to earn as much as $25 million and "helped the bank dominate the heating oil market by locking up New Jersey storage-tank farms adjacent to New York Harbor." The publication also revealed that legendary trader T. Boone Pickens earned as much as $1.5 billion in 2005, for a rate of return exceeding 700 percent, which the editors believe "is the largest one-year sum ever earned."
In August 2006, Goldman Sachs, AIG and Carlyle/Riverstone announced the $22 billion acquisition of Kinder Morgan, Inc., which controls 43,000 miles of crude oil, refined products and natural gas pipelines, in addition to 150 storage terminals.
Prior to this huge purchase, Goldman Sachs had already assembled a long list of oil and gas investments. In 2005, Goldman Sachs and private equity firm Kelso & Co. bought a 112,000 barrels/day oil refinery in Kansas. In May 2004, Goldman spent $413 million to acquire royalty rights to more than 1,600 natural gas wells in Pennsylvania, West Virginia, Texas, Oklahoma and offshore Louisiana from Dominion Resources. Goldman Sachs owns a six percent stake in the 375-mile Iroquois natural gas pipeline, which runs from Northern New York through Connecticut to Long Island. In December 2005,
Goldman and Carlyle/Riverstone together are investing $500 million in Cobalt International Energy, a new oil exploration firm run by former Unocal executives.
In 2003, Morgan Stanley teamed up with Apache Corp to buy 26 oil and gas fields from Shell for $500 million, of which Morgan Stanley put up $300 million in exchange for a portion of the production over the next four years, which it used to supplement its energy trading desk.
Solutions
• Re-regulate energy trading markets by subjecting OTC electronic exchanges to full compliance under the Commodity Exchange Act and mandate that all OTC energy trades adhere to the CFTC’s Large Trader reporting requirements. In addition, regulations must be strengthened over existing lightly-regulated exchanges like NYMEX. Senators Feinstein, Snowe, Levin and Cantwell have introduced S.577 in the 110th Congress which would address many of these issues.
• Impose legally-binding firewalls to limit energy traders from speculating on information gleaned from the company’s energy infrastructure affiliates or other such insider information, while at the same time allowing legitimate hedging operations.
• Congress must authorize the FTC and DOJ to place greater emphasis on evaluating anti-competitive practices that arise out of the nexus between control over hard assets like energy infrastructure and a firm’s energy trading operations. Incorporating energy trading operations into anti-trust analysis must become standard practice for federal regulatory and enforcement agencies to force more divestiture of assets in order to protect consumers from abuses.
• A revolving door moratorium must be established to limit federal government decision makers from leaving the agency to go to entities under its regulatory jurisdiction for at least two years.
The Bush / Cheney Stratagem Part 2 / Chapter 1To read Chapters 1 through 3, see More Articles by Kipper Mathews below.
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Published: Saturday, May 17, 2008
Last modified: Tuesday, June 10, 2008
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Reader Comments:
Posted By: Gustavo Masri
Date: 2008-05-20 01:35:24
Excellent. I have been saying this for years. I keep sending letters to our congressmen and senators. But no one cares. IT IS CRAZY. AS A MATTER OF FACT ENFRURATING.
Gustavo Masri
Rydal, PA