Commodity Futures Modernization Act and the Enron Loophole

Closing Enron Loophole Would Drop Oil Prices 25% – 50% Overnight

Here’s the transcript of the video (above) for the report on the June 18, 2008, edition of “Countdown.”

June 22, 2008

Pensito Review - The way Republicans tell it, the minute we start drilling off the coasts of California, Florida and elsewhere, the price of gas will go down. In fact, it would take five years after the ban on offshore drilling was lifted for oil production to start, and, if it were lifted right now, in 22 years domestic oil production would have increased by only 7 percent, according to the Energy Information Administration. Even so, because oil prices are determined on the international market, any impact on average wellhead prices is expected to be insignificant. (Source: Center for American Progress.)

On the other hand, Congress and George Bush could take a step tomorrow that would create a drop in oil prices of between 25 and 50 percent overnight, simply by closing the Enron Loophole.

This is according to testimony before a Senate Committee two weeks ago by Michael Greenberger, the former director of Trading & Markets for the Commodities Future Trading Commission (CFTC), the government board that oversees commodities markets:

“Yes, overnight [closing the Enron Loophole] will bring down the price of crude oil to get at least a 25 percent drop in the cost of oil and a corresponding drop in the cost of gasoline. Some people estimate 50 percent.”

Greenberger’s testimony was brought to light by an investigation into the Enron Loophole by Keith Olbermann on MSNBC’s “Countdown” last week. (A transcript of Olbermann’s report follows.)

The Enron Loophole is the nickname for a provision written into the Commodity Futures Modernization Act (CFMA) of 2000 that was drafted by lobbyists for Enron and inserted in the bill by then Sen. Phil Gramm (R-Texas) that deregulated an aspect of the market Enron sought to exploit with its “Enron On-Line” trading program, the first Internet-based commodities transaction system. Phil Gramm is now a key economic adviser for the John McCain campaign.

While it was a technical success, Enron On-Line was based on a flawed business model that drained corporate revenues — even while the company was manipulating the rates consumers paid for electricity in California. Enron On-Line eventually drove the company into bankruptcy, and the cooking of the books to hide its losses led to charges of conspiracy and fraud against Enron executives.

The Republicans’ sudden rollout of the campaign to lift the ban on offshore drilling is really meant to shift the blame from Bush and the GOP to the Democrats and their opposition to offshore drilling. To their credit, they have done a masterful job — and it has only cost them the credibility of Florida Gov. Charlie Crist, who broke tradition in the state and came out in favor of lifting the ban. (It also sapped whatever meager credibility Crist’s predecessor, Jeb Bush, had left. Bush opposed lifting the ban when he was in office but came out wholeheartedly in favor of lifting it this weekend.)

The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. - F. William Engdahl, ‘Perhaps 60% of today’s oil price is pure speculation’, Global Research, May 2, 2008