Join thousands of others who rely on our journalism to navigate complex issues, uncover hidden truths, and challenge the status quo with our free newsletter, delivered straight to your inbox twice a week:

Join thousands of others who support our nonprofit journalism and help us deliver the news and analysis you won’t get anywhere else:

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

By Kevin G. Hall | McClatchy Newspapers

WASHINGTON — When oil prices hit a record $147 a barrel in July 2008, the Bush administration leaned on Saudi Arabia to pump more crude in hopes that a flood of new crude would drive the price down. The Saudis complied, but not before warning that oil already was plentiful and that Wall Street speculation, not a shortage of oil, was driving up prices.

Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,

“Saudi Arabia can’t just put crude out on the market,” the cable quotes Naimi as saying. Instead, Naimi suggested, “speculators bore significant responsibility for the sharp increase in oil prices in the last few years,” according to the cable.

What role Wall Street investors play in the high cost of oil is a hotly debated topic in Washington. Despite weak demand, the price of a barrel of crude oil surged more than 25 percent in the past year, reaching a peak of $113 May 2 before falling back to a range of $95 to $100 a barrel.

The Obama administration, the Bush administration before it and Congress have been slow to take steps to rein in speculators. On Tuesday, the Commodity Futures Trading Commission, a U.S. regulatory agency, charged a group of financial firms with manipulating the price of oil in 2008. But the commission hasn’t enacted a proposal to limit the percentage of oil contracts a financial company can hold, while Congress remains focused primarily on big oil companies, threatening in hearings last week to eliminate their tax breaks because of the $38 billion in first-quarter profits the top six U.S. companies earned.

The Saudis, however, have struck a steady theme for years that something should be done to curb the influence of banks and hedge funds that are speculating on the price of oil, according to diplomatic cables made available to McClatchy by the WikiLeaks website.

The cables show that the subject of speculation has been raised in working group meetings between U.S. and Saudi officials, in one-on-one meetings with American diplomats and at least once with President George W. Bush himself.

The Saudi concerns about speculation have a particular sheen of credibility. Saudi Arabia is the world’s largest exporter of oil, serving dozens of clients in addition to the United States. As such, it carefully tracks the trends that drive oil prices, which send it billions of additional dollars with every increase.

But in the cables, Saudi officials explain that they have two primary concerns about artificially high crude prices: that they’ll dampen the long-term demand for oil and that the wide price swings typical of commodity speculation make it difficult for them to plan future oil field development. After that $147 a barrel peak in 2008, for example, prices plunged to $33 a barrel as the global financial crisis rocked the world. That was a stunning change in less than half a year.

One cable recounts how Dr. Majid al Moneef, Saudi Arabia’s OPEC governor, explained what he thought was the full impact of speculation to U.S. Rep. Alan Grayson, D-Fla., who in July 2009 was in Saudi Arabia for the first time.

According to the cable, Moneef said Saudi Arabia suspected that “speculation represented approximately $40 of the overall oil price when it was at its height.”

Asked how to curb such speculation, Moneef suggested “improving transparency” — a reference to the fact that most oil trading is conducted outside regulated markets — and better communication among the world’s commodity markets so that oil speculators can’t hide the full extent of their trading positions.

Moneef also suggested that the U.S. consider “position limits” — restrictions on how much of the oil market a company can control — something the CFTC is considering. But the proposal to prevent any single trader from accumulating more than 10 percent of the oil contracts being traded hasn’t received final approval, and the CFTC also has yet to define what it considers excessive speculation.

Saudi concerns also came up during a May 2008 meeting in Riyadh, the Saudi capital, between U.S. officials and Prince Abdulazziz bin Salman bin Abdulaziz al Saud, the assistant petroleum minister.

Prince Abdulazziz was “extremely worried” that high prices would destroy the demand for oil, according to the May 7, 2008, account of his meeting with embassy officials.

“Aramco is trying to sell more, but frankly there are no buyers,” the cable quoted him as saying, referring to the Saudi state oil company. “We are discounting crudes.”

Another confidential document from the embassy in Riyadh, dated Feb. 14, 2007, indicates that Saudi officials had concluded years ago that speculation played at least as big a role in setting oil prices as traditional issues of supply and demand did.

Recounting the presentation by Yasser Mufti, a planner for Aramco, at a conference of U.S. and Saudi officials, the cable said: “The Saudi analysis indicated a link between higher oil prices and the influx of investor funds into the oil markets.”

Indeed, the cable noted, “As the oil futures markets play an increasingly large role in setting world oil prices, (Mufti) remarked his team was now obtaining better insights into prospective oil prices from banks than from those working in the real oil sector, such as refiners.”

Another document, from Sept. 2, 2009, offers an eerily accurate prediction of today’s high prices, made by Sadad al Husseini, Aramco’s former executive vice president.

“In his view, the bearish energy analysts arguing that the oil price shocks of last summer are not likely to be repeated anytime soon are making inaccurate assumptions,” the cable said, warning that the former Aramco executive saw political uncertainty and a perception of tight supplies as fuel for speculators.

The cable said that “al Husseini predicted that another oil price shock would likely hit sometime in the next year or two.”

A McClatchy investigation earlier this month showed the extent to which financial institutions now influence the price of oil. Until recently, end users of oil — such as airlines, refineries and other consumer of fuel — accounted for about 70 percent of oil trading as they tried to hedge against price fluctuations.

Today, however, speculators who’ll never take possession of a barrel of oil account for that 70 percent of oil futures trading, and the volume of speculative trading has grown fivefold.

That’s why the Air Transport Association, in a filing March 28 to the CFTC, called for aggressive curbs on speculators. The association complained of rapidly climbing jet fuel prices, which have outpaced the rapid climb in crude prices and have reached their highest point since September 2008, right before the near-collapse of the U.S. economy.

“At the same time, according to data recently released by the commission, speculators have increased their positions in energy markets by 64 percent compared to June 2008, bringing speculation to the highest level on record,” wrote David Berg, the airline group’s chief lawyer.

The WikiLeaks documents also shed light on other aspects of Saudi Arabia’s oil industry.

One document said that Saudi Arabia has boosted its excess capacity — the difference between the amount of oil it could produce and the amount it pumps for its clients — from 2 million barrels per day to 4 million, a margin that offers assurance that there’ll be little disruption to oil supplies from political unrest in places such as Libya, where oil production has ground to a halt.

Another quotes the chief economist of Saudi investment bank Jadwa Investment as estimating in June 2008, shortly before oil prices peaked, that the kingdom earned more than $1 billion a day from oil. Another quotes Aramco’s treasurer as saying the state oil company had its own Europe-based global investment fund that in April 2008 had assets worth $60 billion.

A fourth document quotes the Saudi assistant petroleum minister as expressing concern to Ambassador James Smith that Saudis could be “greened” out of the U.S. market. The minister noted in 2009 that the United States for the first time had consumed more ethanol than it did Saudi oil.

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.

KEVIN HALL, NATIONAL ECONOMICS CORRESPONDENT, MCCLATCHY: Thanks.

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.