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Why are governments impotent?
In an age of economic and ecological crises
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Last week, citing the high price of oil, Senator Joe Manchin killed President Biden’s congressional legislation to tackle climate change. He did so by conveniently ignoring the financialization of oil markets and instead framed the problem in terms of supply:
“How do we bring down the price of gasoline?” asked Manchin on Thursday.
“…. you can’t do it unless you produce more. If there’s people that don’t want to produce more fossil, then you got a problem. That’s just reality. You got to do it.”
Is it a coincidence that Senator Manchin has a very big blind spot for the role of ‘Wall St refiners’ in determining the price of oil? Or does he really believe that producing more oil will bring the price down?
No, this blind spot for the role of global finance is common to most – not just to Wall Street’s friends.
While supply and demand have undoubtedly played a role in the dramatic volatility of oil, gas and food prices, the real cause of rising high prices (and their subsequent crashes) lies elsewhere. Understanding this matters because the astronomical rise in the oil price has had severe, and in some places catastrophic consequences for the world’s people. And the oil price shock has accelerated climate breakdown. Carbon emissions have risen as countries fire up coal mines to substitute for costlier fossil fuels.
Why are these chaotic price swings and their dire consequences not managed or mitigated? Why are powerful governments – and central banks – impotent in the face the economic, ecological, and political turbulence caused by this market?
The answer lies in the way in which deregulation empowered those active in financial markets. Prices of commodities in those markets are determined by speculators on Wall St and and at the Chicago Mercantile Exchange – not by politicians in Riyadh or Moscow. Not by the CEOs of global oil companies like BP or EXXON.
Not even by rising demand.
Instead prices are set on global futures, options and derivatives markets, where investors and traders speculate on the direction of the price of oil, and thereby affect the ‘spot’ (or current) price.
As the US Energy Information Administration explains, there are differences between participants in these two marketplaces for oil. Commercial’ traders (e.g. oil producers and airlines) buy and sell physical quantities of oil. ‘Non-commercial’ traders (Banks, hedge funds, commodity trading advisors, and other money managers with towering portfolios) don’t buy or sell oil. They simply buy, sell and speculate on financial instruments - futures contracts and derivatives - embodied in pieces of paper.
The difference is between what some call ‘wet barrels’ and ‘paper barrels’ of oil.
To understand how the oil market works, it helps to compare Russia’s or EXXON’s power over the price of a barrel of oil to Tesla’s power over the price of its electric vehicle. Tesla’s price is high, charging a gross margin of about 30 per cent on each car sold. The ability to set that price and margin is exclusively determined by executives at Tesla, with demand of course playing a role. That price can be adjusted to changes in global currency markets to ensure the gross margin holds wherever cars are sold.
In contrast, while Russian dictators or EXXON executives can influence the supply of oil, the government of Russia and the corporation that is EXXON have little power over the price of a barrel of oil.
Vladimir Putin - whose words are never to be trusted – was right when he claimed (in June 2022) that Russia did not set oil prices.
Much of Putin’s power derives from ‘the market’: Yaneer Bar-Yam estimates that from 2002-2012 Russia received up to an additional $560 billion from financial speculators alone.
Much of this windfall had come directly from Wall Street and the City of London.
writes Rupert Russell.1
When oil prices were low, as in the 1990s, Russian dictators like President Yeltsin lacked the geopolitical power now wielded by President Putin. And in the more recent past the big oil majors have made significant losses from the market’s big price falls, as oil company defenders have argued.
“The past 10 years, major oil and gas companies suffered tremendous losses in 2014, 2015, and 2020. In fact, in 2020 the five integrated super-majors (i.e., “Big Oil”) – ExxonMobil, BP, Shell, Chevron, and Total – lost $76 billion. Oil prices plunged into negative territory in 2020.”
The power to fix the price of oil rests in the global financial marketplaces for oil. The market operates beyond the reach of the producers named above, and beyond the regulatory systems of most governments, as a 2006 US Senate report notes:
At the same time that there has been a huge influx of speculative dollars in energy commodities, the CFTC's ability to monitor the nature, extent, and effect of this speculation has been diminishing. Most significantly, there has been an explosion of trading of U.S. energy commodities on exchanges that are not regulated by the CFTC (Commodity Futures Trading Commission).
Playing poker with the economy and ecosystem
Rupert Russell reminds readers in Price Wars that the power of speculative finance was hitched to real-world commodities markets when US legislation was adopted at the turn of the twenty-first century. Essential commodities like oil and wheat, that had been traded in traditional markets were financialised through deregulation embodied in the Commodities Futures Modernisation Act of 2000. New ‘paper barrel’ instruments – futures’ options’ and OTC derivatives’ contracts (such as credit default swaps) -
would not be regulated as "futures" under the Commodity Exchange Act of 1936 (CEA) or as "securities" under the federal securities laws…..The Commodity Futures Trading Commission's (CFTC) desire to have "functional regulation" of the market was also rejected. Instead, the CFTC would continue to do "entity-based supervision of OTC derivatives dealers".
These financial instruments – let’s call them poker chips – are the focus of speculation and as such are largely detached from the value of the underlying asset. (In just the same way subprime mortgages, bundled together as Collateralized Debt Obligations, became detached from the real housing market in the run-up to 2007-9). There are far more futures contracts traded than there are barrels of oil traded. According to Dr. Kent Moores, speculative financial instruments make up to between 25 and 50 times the total value of the oil on which they are (increasingly only tangentially) based. The prices set by these ‘poker chips’– are driven by a form of magical thinking, accelerated by the herd mentality and ever-escalating competition between speculators.
Speculators active on the Chicago Mercantile Exchange and New York Mercantile Exchange have the Clinton administration to thank for the gift of the Commodities Futures Modernisation Act of 2000. That ‘odious’ legislation to deregulate commodity markets was based on a report co-authored by the “Subprime Three”: Alan Greenspan, Larry Summers and Robert Rubin. It was a consequence of their crushing defeat of Brooksley Born, then chairman of the Commodities Futures Trading Commission.
Brooksley Born had warned in Congressional testimony that the dangerous boom in unregulated trading in OTC derivatives could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.”
She failed. Summers’ and Greenspan persuaded lawmakers that financialisation of the commodities market would in fact make the market more ‘efficient’
Thanks to their intervention, commodity prices are now subject to a volatile arms race of financial alchemy that amplifies prices as they swing wildly up or down.
And that should concern us all. Why should management of the fuel that threatens our ecosystem be beyond the reach and regulation of democratic (or even undemocratic) states and their citizens? Why are societies being held to ransom by those operating in the global market for oil?
It’s the System
The system, the global economic order - designed by economists and central bankers and endorsed by elected politicians - licenses and empowers the owners of capital to drive their capital at whim across borders and to use that capital for rent-seeking and speculation. They may do so without regard to the consequences for a nation’s exchange rate, its public finances or its essential commodity markets.
By these means the owners of much of the world’s wealth – the 1% - exercise immense power over the world’s people and the ecosystem. And they do so within a financial system that is as secretive, closed and ‘encased’2 from the public as the Kremlin.
The ‘walls’ of the system are by very design insulated from oversight by regulatory democracy. Its construction was planned, and is periodically modified, with the specific purpose of preventing governments from intervening to manage and moderate markets in money, commodities and services.
My beef is this: like Senator Manchin, progressives have ignored the global financial system and its vast power - for decades. Unable or unwilling to confront the complexity and reach of speculative finance, the focus is almost always on domestic economic and political frames, sometimes widening to include geopolitics.
The oil (and food) price crises are discussed in down-to-earth terms: good guys and bad guys. Zelensky vs Putin. The energy rich and the energy poor. Victors and victims. And the most egregious - the outdated and simplistic theory of real-world ‘supply and demand’.
We have to abandon these visible, familiar and tangible frames that obscure the less visible, but more dangerous actions of speculators in global financial markets.
The far right has already shown itself willing to confront global markets and to use the ugly forces of authoritarianism, nationalism and protectionism to do so.
It is more than time for the left to grasp, understand and ultimately confront a financial system that renders governments and their citizens impotent in the face of both economic and ecological crises.
This will have to be done on the basis of greater awareness of the international system and increased agitation and regulation. It implies a need for a more co-operative and co-ordinated internationalism of labour - the 99%.
Rupert Russell, 2022, p. 147 in Price Wars: How Chaotic Markets are Creating a Chaotic World.