Subject: How Koch Became An Oil Speculation Powerhouse -From Inventing Oil Derivatives To Deregulating The Market
From: "Michael Andrews" <[email-masked]>
To: "Thad Brown" <[email-masked]>, "Ronnie Mainieri" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Curt Hastings" <[email-masked]>, "Devon Archer" <[email-masked]>, "Chris Heinz" <[email-masked]>
Date: Tue, 7 Jun 2011 13:35:37 -0400

How Koch Became An Oil Speculation Powerhouse
 From Inventing Oil Derivatives To Deregulating The Market
By Lee Fang on Jun 6, 2011 at 2:42 pm

Koch Industries CEO Charles Koch
In April, ThinkProgress caused a stir when we uncovered a series of  
Koch Industries corporate documents revealing the company’s role as an  
oil speculator. Like many oil companies, Koch uses legitimate hedging  
products to create price stability. However, the documents reveal that  
Koch is also participating in the unregulated derivatives markets as a  
financial player, buying and selling speculative products that are  
increasingly contributing to the skyrocketing price of oil. Excessive  
energy speculation today is at its highest levels ever, and even  
Goldman Sachs now admits that at least $27 of the price of crude oil  
is a result from reckless speculation rather than market fundamentals  
of supply and demand. Many experts interviewed by ThinkProgress argue  
that the figure is far higher, and out of control speculation has  
doubled the current price of crude oil.
Reached for information about its trading division, Koch Industries —  
America’s second largest private company — declined our request for  
comment.
Writing on his political blog, an attorney working for Koch’s law firm  
angrily replied to our initial investigation by claiming that Koch is  
solely a bonafide hedger, meaning that it only participates in  
speculative markets to reduce risk for the oil the company refines (he  
also bizarrely argued that speculation has no relation to the price of  
oil). The spin obscures reality: much of Koch’s oil trading business  
is actually akin to a hedge fund, buying and selling financial  
products based on oil with little interest in the actual delivery of  
the product. In fact, Koch pioneered the risky speculation industry  
that dominates the world’s oil markets today, first by inventing oil  
derivatives back in the ’80s, then by working to kill off regulations.  
ThinkProgress has delved into the history of Koch’s oil speculation  
business and the following timeline spells out Koch’s leading role:
– October 6, 1986: First oil derivative is introduced to Wall Street  
by traders at Koch. Koch Industries executive Lawrence Kitchen devised  
the “first ever oil-indexed price swap between Koch Industries and  
Chase Manhattan Bank.” At the time, such derivatives had been limited  
to currency markets, and the shift of creating a synthetic financial  
instrument based on the value of crude oil was revolutionary. For an  
agreed-upon period, an oil swap is a contract where one party makes  
payments based on a fixed oil price, and the other party makes  
payments back based on the changing spot price of oil. In July of  
2009, EnergyRisk magazine, a publication for commodity traders, posted  
a piece exploring the very first oil derivatives and Koch’s role in  
developing them.
– 1990-1992: Koch, along with several oil companies and Wall Street  
speculators, form a coalition lobbying group to deregulate oil  
speculation. A coalition called “The Energy Group” is organized to  
press the Commodity Futures Trading Commission (CFTC) to allow oil  
derivatives to be traded off the NYMEX or any other regulated  
exchange. Participants in the coalition include Koch, Enron, Phibro (a  
powerful commodity speculator firm recently sold from Citigroup to  
Occidental Petroleum), J. Aron & Co (a commodity trading division of  
Goldman Sachs), BP, and other companies.
– January 21, 1993. Wendy Gramm makes first major move to deregulate  
oil speculation. “On the final day of the [George H.W.] Bush  
administration, January 21, 1993, [CFTC chairwoman] Wendy Gramm …  
approved the rule exempting key energy futures contracts from  
government regulation and returned a great chunk of the energy market  
to the grand old days of unregulated futures trading,” writes author  
Antonia Juhasz in the book Tyranny of Oil. The move mirrored the  
demands made by Koch’s lobbying coalition, The Energy Group. Gramm,  
the wife of then-Sen. Phil Gramm (R-TX), leaves the Commodity Futues  
Trading Commission and a month later joins the board of directors of  
Enron.
– 1997: Koch continues to shift from oil refining and pipelines to  
financial products. As Koch continues its embrace of selling exotic  
financial products, the company pioneers the first “weather  
derivatives,” essentially insurance policies sold to utility companies  
that bet on future temperature and weather patterns. Although Enron  
and Koch were the first to develop such financial products, hedge  
funds and investment banks like Goldman Sachs later expand the weather  
derivative business globally.
– December 12, 2000: Sen. Phil Gramm (R-TX), after being lobbied by  
Koch and Enron, creates the infamous “Enron Loophole” vastly  
deregulating the oil speculation market. On the night of December 12,  
2000, Gramm attaches a 262-page amendment to the Commodities Futures  
Modernization Act, which is then attached to an omnibus spending bill  
that is signed into law by President Clinton before leaving office.  
The Gramm amendment, which received absolutely no public scrutiny or  
committee hearings, radically expands and codifies the energy  
deregulation agenda began by Gramm’s wife during the first Bush  
administration. The Gramm amendment allows so-called “over-the- 
counter” energy derivatives not only to be traded outside of regulated  
exchanges, but for private unregulated exchanges to deal in these  
sorts of financial products. Thus, massive “dark” oil speculation  
markets are born, including Enron’s platform for trading energy  
futures, and the Intercontinental Exchange (ICE) — an online  
speculation exchange founded by BP, Shell, Goldman Sachs, Morgan  
Stanley, and other firms. Private e-mails reported by the New York  
Times reveal that members of The Energy Group, led by lobbyists at  
Enron but including at least two lobbyists from Koch and several more  
from Goldman Sachs and Sempra Trading, wrote Gramm’s amendment and  
pressured him to slip it into the bill.
– 2008: Rampant oil speculation spikes prices to unprecedented levels.  
As academics from the Peterson Institute, the James Baker Institute at  
Rice University, and others conclude, non-commercial speculators begin  
to dominate the market, forcing up prices. Although the evidence was  
abundant that speculators caused the massive price spikes during the  
summer of 2008, regulators were toothless to act. A bipartisan  
majority in the Houseoverwhelmingly passed legislation to award powers  
to the CFTC to oversee rampant oil speculation, but Republican in the  
Senate — acting with help from Koch lobbyists — killed the bill,  
called the Energy Markets Emergency Act.
– 2009: Koch presentation to ICE boasts that Koch is on the level of  
transnational big banks and can now be considered one of the world’s  
top five oil speculators. The presentation, and our analysis, can be  
found here. Of course, Koch is not the only large corporation engaged  
in this practice. Large investors, like pension funds, hedge funds,  
investment banks, and others flocked to the commodities market after  
the financial crisis of 2008 and the collapse of mortgage-backed  
securities.
– 2010: Koch’s Tea Party front groups and lobbyists fight financial  
reforms designed to reign in the unregulated energy market. While  
Americans for Prosperity, as well as other Koch fronts, decry the Wall  
Street reform bill debated in Congress, Koch lobbied to water-down  
provisions of the bill related to derivatives. The sweeping Dodd-Frank  
reform bill contained broad new powers for the CFTC to crack down on  
excessive oil speculation, while also requiring that derivative are  
eventually traded on a regulated and open exchange.
– 2011: As oil speculation again hits record highs, leading to record  
high oil prices, Koch’s allies in Congress fight to undermine new  
reforms and allow unchecked speculation to spiral out of control. As  
ThinkProgress has reported, oil speculation is currently at a record  
level, which experts, and even many Republicans now agree, is causing  
pain at the pump. After a furious lobbying campaign, the CFTC  
postpones Dodd-Frank mandated regulations on excessive oil  
speculation, known as position limits. As the CFTC grapples with how  
to implement these new rules, newly elected Republicans, many with  
Koch-backing, propose steep cuts to the CFTC to undercut any rules on  
oil speculation.
Charles Koch, the CEO of Koch Industries who is worth a reported $22  
billion, likes to call his business an example of something he  
describes as the “Science of Liberty.” In reality, his company’s  
deregulation crusade has contributed to rolling blackouts,  
consolidation and monopolies in financial markets, and economy- 
wrecking oil price spikes. In comments to the CFTC, the reform-minded  
nonprofit Better Markets noted that, “the history of these markets is  
a history of anti-competitive, self-interested, predatory conduct that  
serves the interest of the exclusive few at the expense of the many  
and the system as a whole.”
After working furiously to unleash oil speculators like Koch and  
Enron, the Gramm family wasrewarded with plum jobs, including spots on  
corporate boards and placements at speculator-funded think tanks.  
Wendy Gramm still holds a position at the Koch-funded Mercatus Center  
at George Mason University, although she hasn’t authored a paper in  
years. While the Gramm family has faded somewhat from the public eye,  
their actions have radically changed the global economy. Since the  
Koch-Gramm-Enron deregulation bonanza, non-commercial oil speculators  
have flooded the market and increased the price volatility of oil in  
leaps and bounds, hurting consumers and businesses across the globe  
while making a small set of oil barons and financial giants very rich.
A McClatchy investigation found: “Prior to the 1990s, speculators made  
up about 30 percent of the futures market. In the latest reporting  
period, the ratio on May 3 stood at 68 percent speculators to 32  
percent users of oil.” The following chart illustrates the dramatic  
changes in the oil speculation market following the Koch-prescribed  
deregulation campaign, and how non-commercial speculators have pushed  
the price of oil higher and higher:

Michael Greenberger, a former top staffer the CFTC, explained to me  
that a common misperception is that oil companies are only bonafide  
hedgers, meaning they only participate in the futures market to lock- 
in prices for delivery of their product. With the exception of  
ExxonMobil, which has explicitly stated that it does not engage in  
speculation, all the major oil companies (Shell, BP, Occidental, etc)  
operate like Wall Street investment banks and use their privileged  
position in the oil market to make speculative bets on the price of  
oil. And as the unregulated oil market has grown, investment banks  
like JP Morgan and Morgan Stanley have become more like oil companies,  
buying tankers, pipelines, oil containers, and other physical assets  
to give them an edge while betting on oil. The Koch contango strategy  
detailed by ThinkProgress is not limited to Koch Industries either —  
Shell for instance is known for buying up cheap oil, storing it in  
tankers, and betting on future prices as they reserve the oil from the  
market.
Tyson Slocum, an expert on oil speculation at Public Citizen, has  
called Koch one of the worst actors when it comes to oil speculation.  
Koch, Slocum explained in an interview with ThinkProgress, is unique  
because of its status as a political powerhouse as well as a  
speculator with operations all over the world.