The Book of Morgan:
Why are gas prices so high?

By Jed Morey

In the beginning, there was oil. Well, not exactly oil but its ingredients. Once-living organisms became one with the planet upon their deaths, eventually breaking down and congealing over millions of years to form the lubricious substance we know today as oil. Time, heat and pressure created the necessary conditions to concoct this lifeblood of modern human existence.

Today, as we stare at the rising price of gasoline with bewilderment, we wonder how it came to be that something so ubiquitous could be so expensive. For the past few years I have written a great deal on this very subject and have come to the conclusion that while peak oil is a real phenomenon not just a theory, our ingenuity has held this reality at bay for the time being. Furthermore, the forces that cause price spikes and volatility in oil and the commodities markets as a whole have little to do with actual market conditions such as supply and demand.

The investment banking industry, with the assistance of the federal government, has surreptitiously hijacked the oil business over the past decade and caused the price of oil to skyrocket. But this is rarely the story that is told in the media. And because the subject matter is so dense, it's difficult to explain. It's complicated and boring. No way around it.

So instead of banging the oil drum here for the umpteenth time to no avail as I watch pundits butcher the subject and politicians lie through their teeth to the American people, I have decided that a change of venue is in order.

To properly explain why oil prices are so high, I enlisted the support of my friends Doug Wood and Rob Bellon to help me tell the story a little differently. In lieu of my normal offering in Off The Reservation, we have produced an 8-minute video called "The Book of Morgan," which tells how investment banking giant Morgan Stanley came to rule the oil world.

The story itself is an age-old chronicle of greed and corruption filled with intrigue and dirty dealings. It illustrates how Morgan Stanley, among others, took the hidden world of commodities trading from a $10 billion industry to a $450 billion business by maneuvering through generous loopholes created by Congress. It shows how Morgan Stanley not only dominates the trading arena but how it has become a full-fledged Big Oil company from transportation to terminal storage to having an ownership stake in the very exchange that half of the world's oil is traded on.

So with that, I invite you to watch the video and judge for yourself why the price of oil has skyrocketed. The purpose of presenting it this way is to open more eyes as to how rotten our system truly is and to elevate the dialogue about one of the most crucial economic elements of our daily lives. In the next several months we will be bombarded with finger pointing and accusations with respect to gasoline prices as the presidential campaign heats up. But few of the arguments you will hear will resemble the truth. For the truth, my friends, can only be found in the gospel according to Wall Street−and "The Book of Morgan."



1993, January – As one of her last acts as chairwoman of the CFTC, the financial regulatory authority that oversees the commodities market, Wendy Gramm created an exemption that allowed Enron to trade energy futures contracts without oversight from the CFTC.
1993, February – Just weeks after leaving her post at the CFTC, Gramm is rewarded by Enron for her years of service with a board position. The New York Times reported, "According to a report by Public Citizen, a watchdog group in Washington, 'Enron paid her between $915,000 and $1.85 million in salary, attendance fees, stock options and dividends from 1993 to 2001.'"
1999, November – Congress enacted the Gramm-Leach-Bliley Act, which repealed critical parts of the Glass-Steagall Act of 1933. Most notably the new law removed the barrier between commercial deposit banks and investment banks, allowing them to merge despite that being considered one of the primary causes of the banking crash that presaged the Great Depression. The bill was the culmination of decades of lobbying from free-market advocates.
2000, May – Jeffrey Sprecher founded the Intercontinental Exchange (ICE), an electronic trading platform created to provide a more efficient method of trading energy futures. Traders for Enron, who had been trading energy futures thanks to Wendy Gramm's exemption, began trading aggressively on the ICE. Morgan Stanley is one of the principal founders and owners of the ICE.
2000, December – Wendy Gramm's husband, Sen. Phil Gramm (R-Texas), sponsored the Commodities Futures Modernization Act (CFMA), with a provision now known as the Enron Loophole. The CFMA exempted over-the-counter derivatives such as credit default swaps and energy products like oil traded on the electronic exchanges from federal regulatory oversight. It also allowed any party considered "sophisticated" to participate in trading commodities, thus allowing investment banks and hedge funds to directly trade futures.
2001, December – Enron unravels and files for bankruptcy. Under the direction of Ken Lay, a close associate of Phil Gramm, President George W. Bush and Vice President Dick Cheney, Enron had pushed the company to manipulate energy futures to artificially inflate its profits. Auditing firm Arthur Andersen is swept up in the scandal, eventually forcing it out of business as well.
2006, January – The CFTC, under President Bush, recognizes the ICE as a foreign-based exchange in part because it had acquired the commodities exchange in London, the International Petroleum Exchange (IPE), in 2001. So despite the fact that the ICE was formed in America, based in Atlanta and publicly traded on the NYSE, the Bush administration decided to treat it as though it were centered in London. This exempted the ICE from all U.S. regulatory authority and eliminated all transparency in the marketplace.
2006, June-August – Morgan Stanley under the direction of John Mack acquires TransMontaigne, Inc., and its subsidiaries. TransMontaigne is an oil terminal storage company that specializes in the refined petroleum business. Today, TransMontaigne controls one-third of the terminal capacity in the U.S. Mack is at it again as Morgan Stanley acquires Heidmar, a shipping company that owns 80 oil tankers. Now it operates more than 120.
  2008, March – Morgan Stanley analyst Douglas Terreson says oil would hit as much as $95 per barrel in 2008 but retreat to around $83 per barrel throughout 2009.
  2008, March – Bear Stearns collapses and is sold to JP Morgan for $10 per share, sending shockwaves through Wall Street and shaking investor confidence around the globe.
2008, May – Terreson is let go from the firm. In his place, Richard Berner, Morgan Stanley co-head of global economics, issues a statement saying that crude oil could easily reach $150 per barrel. Though Morgan declined to be interviewed by the Long Island Press at the time, Berner's assistant claimed that he "doesn't deal in oil."
  2008, July – The price of a barrel of oil hits $147. A report titled "Double Jeopardy: Responding to High Food and Fuel Prices," issued by the World Bank, estimated that "up to 105 million people could become poor due to rising food prices alone," with "30 million additional persons falling into poverty in Africa alone."
  2008, September – Lehman Brothers fails at the height of the global banking crisis. Despite reaping incredible profits from the speculative oil bubble it helped produce, Morgan Stanley borrows $107 billion dollars from the Federal Reserve. Morgan Stanley and Goldman Sachs both emerge from the crisis, bigger and more powerful than before.
2010, July – President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among several initiatives, Dodd-Frank issues new guidelines for commodities trading and the clearing of trades such as derivatives. So far, none of the proposed regulations for the commodities arena that would have any impact on energy futures trading has yet to be enacted.

Support Senator Bernie Sanders (I-VT) and his effort to stop rampant speculation in the oil markets.
Read his proposal below and click "like":
http://www.sanders.senate.gov/newsroom/news/?id=4ca97acf-23fb-4d77-9d57-a8469df0ec17

To read more about Wall Street's influence over oil prices click here:
http://jedmorey.com/2009/crude-how-wall-street-screwed-america-in-the-summer-of-2008/

The map utilized to illustrate the Northeast Home Heating Oil Reserves can be found at:
http://en.wikipedia.org/wiki/File:Blank_US_Map.svg

All other footage in this video is either original or public domain.

The opinions expressed herein are solely those of Jed Morey.