Neff Zone Column -- June 21, 2008

Print Edition: June 21, 2008

THE OIL GAME – PART 3

In two previous columns I’ve presented the argument that the current run up in world oil prices are due to more than simple supply and demand. Quoting expert worldwide sources I’ve asserted that the actual physical supplies of oil are more than adequate for today’s marketplace and that speculation on the world’s oil futures market are responsible for nearly half of the current price for a barrel of oil.

If you agree that these points are at least open for discussion, then the next logical question is the classic Butch Cassidy and the Sundance Kid line: "Who are those guys?" My answer would be that most of the speculation that is inflating the oil market right now is being done by huge international hedge funds.

Leading business Web site Forbes Investopedia www.investopedia.com has a detailed definition of a hedge fund, but a few phrases therein stand out: "aggressively managed…the goal of generating high returns…open to a limited number of investors… hedge funds are unregulated…think of hedge funds as mutual funds for the super rich." The bottom line is that a hedge fund is an unregulated way for the super rich to make massive profits in a short period of time.

International hedge funds can pretty much scour the globe for money making opportunities and some are so massive that they can, in fact, influence global markets and the economies of individual countries. The majority are legitimate investment ventures, but some are slick quick hitters, making fast cash and then "getting out of Dodge" one step ahead of those who would attempt to waylay their actions.

A good example is The Childrens’ Investment Fund (TCI) operating (officially) from London, the 9^th biggest fund in the world with over $15 billion in assets. Its name would imply a benign entity, but looking at its involvement in the current oil price inflation is interesting to say the least.

TCI’s strategy is to turn a profit on any specific investment sector within 3-5 year window and then move on (Wikipedia). The company has been embroiled in alleged attempts to unduly influence the German and London stock exchanges and banks in Germany and Japan, for example. TCI’s attempt at controlling Japan’s largest electricity company prompted the Japanese government to pass a new law this month to the effect that: "Japan can deny foreign investors access to industries it believes are vital to the country’s economic and political well being." (The Guardian – UK.)

As for the oil market, here’s where things get interesting. Reported by the Doug Stephan radio show last week (syndicated throughout the country and available on a local Cadillac station), TCI has gotten an influx of cash from none other than Saudi Arabia; perhaps as much as 8-10% of TCI’s cash flow is coming directly from the Saudi’s. Because of TCI’s aggressive movement in the worldwide energy sector increases in oil prices benefits them greatly. It also benefits the Saudi’s. What a parlay!

But wait, TCI is an insightful operation, so they play all the angles. As gas prices rise, for instance, more Americans are paying for their fill-ups via credit card. Guess who just bought 4.34 million shares of MasterCard. As gas prices rise and more Americans turn to mass transit, guess who is trying to take over the largest owner of rail lines on the East coast, CSX – bingo! And, gee willikers, I’m sure the Saudi’s have no idea what’s going on. Heavens to Betsy, they’re our good friends and trusted allies.

Ah, but sometimes the good old US of A wakes up in time to smell the coffee, and this whole CSX thing may just be our national alarm clock. Said a New York judge this week in a ruling regarding the CSX takeover attempt: "Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so. A few cross that line." Chris Hohn, head of the London-based hedge fund TCI – The Children's Investment fund – crossed that line." The judge went on to note: "Mr. Hohn and his partner Snehal Amin had made courtroom statements that were "not credible" and that they "testified falsely" during the trial. In particular… (TCI has) effectively amassed a coordinated group of rebel investors that should have been disclosed long before TCI told the company it had been working with allies." -- The Independent – UK. (Hmmmm…. "rebel investors" … "allies" … I wonder who that could be?)

The CSX vs. TCI court case will be ongoing for some time. TCI claims that they will be a more efficient operator of the railroad. CSX (and others) wonder what would happen if a foreign firm gains control of the nation’s rail lines.

On the same wave length, partially as a result of this case and other anomalies in worldwide oil pricing, a USA Today article reported on Wednesday: "With suspicions of oil speculation on the rise, the USA's top commodities cop announced steps Tuesday to close some regulatory loopholes that hindered its ability to detect market abuse. The moves are designed to make it easier for U.S.-based regulators to monitor investors that trade U.S. oil on foreign exchanges and identify ones that try to game the system."

The oil game will still have casino-like elements, but at least the Commodity Futures Trading Commission (CFTC) will have a way to monitor the action on trades in Europe, London and the New York Mercantile Exchange (Nymex). "The CFTC will now be able to observe a trader's full position in both U.S. and foreign futures markets to ensure that traders are not gaming one market to influence the other."

Next week, how you are impacting the world energy market right now, even though you may not realize it.

Jim Neff is a local columnist. Comments to neffzone@gmail.com. Read Neff Zone columns on line at www.neffzone.com/cadillacnews.