And when oil doubled to more than $147 a barrel, no one was more suspicious than Dan [image-nocss] Gilligan, president of the Petroleum Marketers Association of America (PMAA), said the report. When the program talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.
"Approximately 60% to 70%t of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.
Hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets, and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.
In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States, the report said.
"We talked to the largest physical trader of crude oil. And they told us that compared to the size of the investment inflows and...they said that we are basically a flea on an elephant, that that's how big these flows were," Masters said.
Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. "We believe that high energy prices are fundamentally a result of supply and demand," he said in his testimony.
As it turns out, not even J.P. Morgan's chief global investment officer agreed with him. The same that day Eagles testified, an email went out to clients saying "an enormous amount of speculation" ran up the price."
A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters said the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.
Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients' money.
Gilligan agreed. "Are you saying that companies like Goldman Sachs and Morgan Stanley and Barclays have as much to do with the price of oil going up as Exxon? Or...Shell?" Kroft asked.
"Yes," Gilligan said. "I tease people sometimes that, you know, people say, 'Who's the largest oil company in America?' And they'll always say, 'Exxon Mobil or Chevron or BP.' But I'll say, 'No. Morgan Stanley'."
Morgan Stanley is not an oil company in the traditional sense of the word-it doesn't own or control oil wells or refineries, or gas stations. But according to documents filed with the Securities & Exchange Commission, Morgan Stanley is a significant player in the wholesale market through various entities controlled by the corporation. It not only buys and sells the physical product through subsidiaries and companies that it controls, Morgan Stanley has the capacity to store and hold 20 million barrels. For example, some storage tanks in New Haven, Conn. hold Morgan Stanley heating oil bound for homes in New England, where it controls nearly 15% of the market.
Goldman Sachs also has huge stakes in companies that own a refinery in Coffeyville, Kansas, and control 43,000 miles of pipeline and more than 150 storage terminals.
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