TDI Podcast 63: OIL-OIL-Enron Loophole-OIL-OIL | The Disciplined Investor

Guests: Prof. Michael Greenberger and John C. Dvorak discuss the Enron Loophole, the London Loophole and the skyrocketing price of oil. We also find out how closing the loophole could bring the per barrel price of oil down 25%!

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Since July 2001, Michael Greenberger has been a professor at the University of Maryland School of Law, where he teaches a course entitled “Futures, Options and Derivatives.”

Professor Greenberger was a partner for more than 20 years in the Washington, D.C. law firm of Shea & Gardner, where he served as lead litigation counsel before courts of law nationwide, including the United States Supreme Court.

In 1997, Professor Greenberger left private practice to become the Director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC).

related links:
Greenberger’s Testimony




  1. ArianeB says:

    Here’s the thing… the problem is not speculation. The oil market is divided into two parts, the spot market price, and the futures price.

    The futures market is a zero sum game, for every buyer betting that the price will go up,there has to be a seller who is betting the price will go down. There is simply no way that futures trading can possibly “game” the price up. It goes up because there are more people betting the price will go up.

    That leaves the spot market, which bases the price on the futures market. At the time that the futures contracts come due, all futures traders still holding contracts have to sell their due contracts, and all futures traders selling short have to buy. This final coming due of contracts determines the spot price. Currently the spot price can be seen looking up CLQ08.NYM.

    The ONLY way you can manipulate the price is to hold on to contracts, take posession of the oil, and store it somewhere, and leave it there to create an artificial shortage.

    This is EXACTLY what Enron did to drive up the price of electricity in California. They bought the electricity and held it back from use, primarily by lowering output of electricity plants.

    So is this happening in the Oil market? NO!!

    Oil reserves can only be stored in so many places, and EIA keeps track of these reserves and publishes the reserve label in a weekly report.

    Oil reserves are down 14% over the last year

    http://tonto.eia.doe.gov/oog/info/twip/twip_crude.html
    Pay special attention to the “Days of Supply” measure.

    If oil reserves are down, there is no market manipulation. In a market of 20 million barrels per day in the US, there simply is no way to store enough oil to make a difference in the supply. Eventually you have to sell it, and that will just drive the price down.

    If you REALLY want to know whats going on, here is a link to an article, backed up by data that explains six reasons why the price of oil is skyrocketing.

    http://europe.theoildrum.com/node/4224

    Bottom line is declining production in the world wide due to geological restrictions (aka Peak Oil), it is also declining exports due to “Export Land Model” effects. It is also speculation due to constant threats of war in the middle east, and terrorist activities in Nigeria. It is also record growth in car/manufacturing growth in China.

    By the way, just because there are no lines for gas here in America (where we seen willing to pay $140 a barrel), but the lines are huge in other countries: Thailand, Western Australia, Argentina, Honduras, Pakistan, etc.

  2. QB says:

    I haven’t listened to the whole thing yet, but didn’t congress close the Enron loophole this year as part of the farm bill? I’m Canadian so I’m up to date on US stuff.

    BTW, if you want something to think about in the next election: Phil Gramm and Tom Delay were the duo behind this loophole and put it into a rider on a budget bill back in 2000. In the last 8 years it wasn’t closed and was killed twice by Republican filibusters.

  3. Nimby says:

    #1 ArianeB said: By the way, just because there are no lines for gas here in America (where we seen willing to pay $140 a barrel), but the lines are huge in other countries: Thailand, Western Australia, Argentina, Honduras, Pakistan, etc.

    Sorry. I live in the second largest city in Thailand (Chiang Mai) and there are no lines for gasoline here. Cost is about 43 baht per liter which is a bit less than $1.50 per liter or almost $6 per gallon at the local Shell station.

    Maybe you are referring to the current shortage of LPG in Bangkok. There, the taxi fleet has been mostly converted to LPG and supplies are scarce. There is a widespread belief that this shortage is being manufactured by vendors in anticipation of a major price hike soon to be approved by the Gov’t.

  4. QB says:

    Fascinating talk, thanks. I’ve been out of the commodities business since 1998 (mainly gas, oil, and forex) but I was lucky enough to work on big marketing and trading floors and the pits in Chicago. I wasn’t a trader or marketer but I wrote a lot of software which managed portfolios, hedged risk, reported, and authorized trading.

    I had read about the Enron Loophole but hadn’t known about the London Loophole. In the 90’s there were things done by traders which involved intrabook manipulation – Enron just being the biggest example of this. However, one thing I do know is that electronic trading was a much smaller percentage of the commodities business than it is now.

    I’m going to read more about this but it seems obvious that the principle of “open outcry” has been lost. Open outcry is an old term meaning that you have to publicly call out your price for buys and sells so everyone knows who is trading what amounts and for what price – this is why trading pits used to exist. A transparent mechanism like that should be key part of any commodity exchange, whether electronic or not.

    What’s obviously happening is that all liquidity has left the securities business (due to the financial meltdown) and has gone into the commodities business as a reaction to the subprime fiasco. The massive upsurge in electronic trading in commodities has only made this easier and less transparent. Too many speculators, not enough “real hedgers” or market makers.

    I’ve looked quickly at coal, corn, steel and various other commodities and the same thing is happening there. I think that a part of that may be linked to fuel futures since all of them are correlated to fuel to some extent.

    Thanks again for this.

  5. GregAllen says:

    There isn’t an oil shortage. There is a regulation shortage.

  6. deowll says:

    I decided the guy was a con artist or a nincompop and turned it off when the claim was made that a law passed by congress could control international oil prices. Right.

  7. bobbo says:

    Great Info==thanks for posting it.

    With this being completely unheard of in the popular press/media==how come the Dems are moving to close the loopholes and how come the Repukes aren’t fighting them more than they seem to be?

    When there is “a dark market” it still seems to me that somebody, somewhere, somehow is still breaking some general law even while a more specific law has not been crafted to stop it?

    JCD==you just called it manipulation of the market==should be a “general law” against that even if not a specific one? Yea, I’m whining.

    Speaking of oil, Delay struck me as a greasy bastard the first time I hear him speak. I think he said “Hello” and I knew he was dirty–even for a republican. Haven’t heard much about his prosecution in Texas yet, other than he still claims he is innocent.

    Everyone in Congress becomes RICH during their stay. What could possibly be the reason for that?

  8. DethLok says:

    #1 ArianeB said: “By the way, just because there are no lines for gas here in America (where we seen willing to pay $140 a barrel), but the lines are huge in other countries: Thailand, Western Australia, Argentina, Honduras, Pakistan, etc.”

    Like Nimby, I’m in one of those places, Western Australia specifically. There are no queues for petrol here, and we’re paying $1.51/L, well, I paid that on Saturday. Sure, it’s more expensive than it used to be, what isn’t? It’s cheap by world standards, and I’m lucky I in that I live a 30 minute bicycle ride from work, so driving is optional for me in good weather and there is plenty of that 🙂

    Now gas, gas we are definitely currently short of, as a major installation went bang a month ago and took out 30% of our states supply, possibly for the rest of the year. Gas in Australia is literally a gas, for use in a kitchen stove, a factory (newer electric power stations run on gas here but we are now restarting some recently closed old coal fired ones…) or heating. It’s not gasoline, we call that fuel “petrol” in this country. We have gas pipelines running thousands of kilometres, and one isn’t working now. Unfortunately there is no spare capacity to use to replace it.

    And even with a shortage of gas, turning off lights, reducing heating (put on some warm clothes, it’s winter down here and cold today, 18ºC was the max, brrr! 🙂 and reducing electricity demand by turning off lights has meant only some businesses are suffering (commercial laundries being one of them). So far…

    All that aside, it would be nice to have cheaper fuel, from whatever origin, fossil or bio. Fingers crossed something will improve and soon.

  9. Jim says:

    good podcast… more informative about the hidden trading side than most anybody will admit to. i will definitely share the link to this podcast to whoever i can. yea, it’s a bit lenghty for some. but for those take the time to listen from people who know what they are talking about, the more it shakes your head and ask why the hell are speculators allowed to get away with this?

    thanks for sharing that.

  10. J says:

    # 4 QB

    hey did you know Earl?

  11. ArianeB, you seem to have missed the point. The trading is black..nobody knows if there is this balance you speak of. It’s fixed. The transparency is not there. HELLO! Are you claiming it is not possible?

    The missing logic stems from the supply and demand reality. Demand is down. In the process the price doubled from $65 a barrel to $140. Yeah, that makes sense. And as demand falls further we are told to expect $200 oil. It’s a farce.

    Meanwhile, most people do not understand the way commodities work and love to fall back on simplicities such as “peak oil” or other green mantras.

    As for the farm bill closing the enron loophole, it only closed the natural gas side not the crude oil side of the loophole.

    My prediction is that oil prices will collapse after the summer holidays since the traders and the system will not be able to hold back the oil from the consumption system (aka refineries, gas pumps) much into the fall. When it falls, it will fall fast.

    And, yeah, where is that douchebag Tom Delay?

  12. QB says:

    Earl Silbert? No, I was a simple programmer, or spare body part, working in Sector 7G.

  13. QB says:

    Uncle Dave said: “As for the farm bill closing the enron loophole, it only closed the natural gas side not the crude oil side of the loophole.”

    I didn’t know this until listening to this show. This is especially bad since a large number of commodities have some positive correlation with WTI crude. Not just coal, natural gas, and jet fuel but things like wheat, corn, and orange juice. Very nasty indeed.

    “And, yeah, where is that douchebag Tom Delay?”

    Phil Gramm, the other mastermind behind this, is John McCain’s chief economic adviser.


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