WikiLeaks: Saudis Often Warned U.S. About Oil Speculators

WikiLeaks: Saudis often warned U.S. about oil speculators

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Kevin Hall of McClatchy Newspapers has been going through WikiLeaks and found something somewhat surprising, not just that speculation is helping drive the price of oil perhaps as much as $40 a barrel, if you are to believe–guess who?–the Saudis, who seemed extremely concerned about how high the price of oil is getting. We will now ask Kevin why. And he now joins us, Kevin Hall, who’s the national economics reporter for McClatchy. Thanks for joining us, Kevin.


JAY: So, first of all, what did you find? And why are the Saudis concerned about it?

HALL: Well, in a series of documents that date in 2007, 2008, the Saudis are voicing concern about the role of speculation in the oil markets, the prices. You remember, back at that point we had kind of a steady march upwards in price, which peaked in July 2008 at $147 a barrel. It was the all-time high. And then, several months later, it collapsed by $114–by December it was down to $33 a barrel, if I’m not mistaken. So you had about a $114 swing in oil prices. And this is precisely what the Saudis had feared, that you would have what’s called demand destruction, that you’d have prices so high, people would stop driving, it would affect the economy, and then demand would shrink. Nobody predicted as steep a drop as that happening, but that accompanied the near-collapse of the US financial system and, again, a $114 swing in prices.

JAY: Now, there’s also some mention about getting greened out of the US markets. What did they mean by that?

HALL: Well, the Saudis in several documents are voicing concern, starting with President Bush and continuing into President Obama, about this reference to we need to break our addiction to oil. In one of the documents they say, we can help you break the addiction to oil–which is a veiled threat to sell elsewhere. What had concerned the Saudis was that in 2009 the United States actually consumed more ethanol than it did imported Saudi oil. The Saudis are somewhere between third and the fifth–depending on the year, the third to fifth largest supplier of oil to the United States. The United States produces more than half of the oil it consumes. And their concern as we move towards green energy and alternative energy is where do they fit in the energy panorama.

JAY: Now, perhaps the big story here, though, is the confirmation of how important people that should know supply and demand of oil, which is the Saudis, confirmation from their point of view just how important speculation is. And you talk about how that’s changed, how end users used to be the predominant buyers of futures in oil, and now it’s–what? I think it’s switched from 70 percent one way to 70 percent the other way. Can you talk about that?

HALL: It’s reversed itself. Where historically speculators made about 30 percent of the futures market, which is the market for future deliveries of contracts, contracts for future delivery of oil, they now make up 70 percent. So it’s been a complete reversal. And there’s a growing number of people believe that this excessive role of speculators in the market is pushing upwards prices. And I think we’re beginning to start to see that unravel in different places. The regulators are starting to pull out that threat a bit. But the documents make real clear that the Saudis are telling both Bush administration and later the Obama administration that these oil price movements aren’t driven by supply-and-demand fundamentals. In 2007, 2008, the Saudis are telling us, our ambassador, our representatives from the Energy Department who were visiting, we’re putting out more crude, we’ll do what you say and pump more crude, but we don’t have buyers for it. There is more than adequate supply. The problem is speculation. And you see that on a number of occasions. And at one point, one of the most telling documents is where the Saudi Aramco there, the state-owned oil company, notes that they no longer go to refiners and others in the energy markets to get a sense of where they think price will be going in the future; they started going to banks. Now, that seems to confirm the excessive role that Wall Street and big finance is playing in the futures markets.

JAY: I thought you made an interesting point in the article where you talk about one of the reforms–even the Saudis suggest this, and it’s certainly one that’s being talked about–of having position limits. In other words, no individual speculator could have, perhaps, not more than 10 percent of the futures. But you’re saying that’s not really the problem. The whole sector’s driving this, not just one or two big players.

HALL: Right. I mean, I think the conventional wisdom has been, well, if you take these [incompr.] position limits, that no one trader can have more than x percent of the market, that this will make a difference. And in fact the Commodities Futures Trading Commission earlier this year proposed 10 percent, that no trader could have more than 10 percent of the market. But that may be shooting at the wrong target. There’s a growing body of evidence–it’s probably more complicated than to get into in this forum here–but the role of what are called investment funds or commodity index funds. And people who are big institutional investors were taking what are called long positions, basically betting way out into the future that oil prices are just going to keep going up. And this has kind of the perverse effect of expectations and kind of drawing up the price.

JAY: So it becomes a real self-fulfilling prophecy.

HALL: Self-fulfilling prophecy. Exactly. It pulls up the price even though the demand and supply fundamentals may suggest otherwise.

JAY: So what reform would work? I’ve heard it suggested the only reform that really would work is that the only people or companies that could be allowed to buy futures are actual end users who are trying to hedge, like airplanes, or agricultural, even; that you don’t allow speculation, period. There’s–nothing short of that’ll actually work.

HALL: Well, you need a certain amount of speculation. I mean, the entire reason why you have these futures markets is to hedge against price fluctuation.

JAY: But they’re saying that it should be the end user should be allowed to do that, not just the finance sector.

HALL: Well, the end users would be on one end of the deal. You’d have to have a certain amount. And historically, again, that 70:30 ratio has been what–over the long march of history has been the normal ratio, ’cause you want a certain amount of speculation in there to kind of help people hedge their bets. But when you get it to the reverse and when you have, you know, a fivefold increase in what are called paper barrels that are never going to be delivered, they’re just financial pieces of paper, you know, trading at five, six times the amount of physical oil, that tells you something’s awry.

JAY: So what reform would get us back to the previous ratio?

HALL: I think something that actually put into law a hard, fast figure–30 percent, 40 percent, I’m not sure where that precise number is. The problem is, even something as simple as this 10 percent is being just fought tooth-and-nail by Wall Street, and Wall Street’s pushing real hard. House Republicans have managed to get it through the Ag Committee, and I believe through the Banking Committee, the Financial Services. If that hasn’t happened, it’s about to happen. That would push back the implementation of this derivatives legislation that passed last year, the Dodd-Frank Act, the part that would regulate trading in these dark markets for oil and create a platform where [incompr.] a lot more transparency in this stuff. They’re trying to push that mark off 18 months, which would put us, you know, past the next election cycle, and they’re betting on a Republican administration.

JAY: Or more people in–more Republicans in the House that could block something like this.

HALL: Exactly.

JAY: Thanks very much for joining us, Kevin.

HALL: Thanks for having me.

JAY: Thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

Kevin G. Hall

Kevin G. Hall, is the national economics correspondent for McClatchy Newspapers. Previously he served as Latin America correspondent. During his career he has reported from Mexico City, Saudi Arabia, Miami, Los Angeles and Washington, D.C., for the Journal of Commerce and United Press International. He speaks Spanish and Portuguese.