Bush-Cheney Israel Disinformation Campaign to Justify an Attack on Iran

Campaign's Overall Design and Objectives

The Bush administration and Israeli government appear to be operating a joint disinformation campaign, whose objective is to establish a media based alternative reality from which to accuse Syria/Iran of developing nuclear weapons with help from North Korea, by using a real event combined with planted stories establishing a defining narrative. This accusation in turn is augmented with stories about Iranian sponsored "Special Groups killing US troops in Iraq" and purported naval incidents the Persian Gulf, creating self-reinforcing, media based crisis.

The immediate purpose of this disinformation campaign is apparently to help justify the planned US attack on a wide range of Iranian industrial and military targets. And, as in the Israeli attacks on Lebanon, the objective is to swiftly inflict substantial damage to the national infrastructure of Iran, followed by an abrupt cessation of attacks and a call for a cease-fire to prevent substantial Iranian retaliation. Again, as in the Israeli attacks on Lebanon, the US likely will resist calls for a cessation of the attacks until a significant portion of the Iranian target set has been addressed, then it will accept calls for a cease-fire and demand Iran do the same.

Any subsequent attacks by Iran would probably be characterized by the US as Iranian aggression, further justifying US follow-up attacks on remaining Iranian assets as defensive measures. The transparent duplicity of such US actions and claims is not a problem because US corporate media is prepared to report repeatedly the administration's claims with little or no criticism or mention of alternative assessments. In other words, subjecting its audience to blatant propaganda masquerading as journalism, which is effective as it is because of US corporate media's quantitative monopoly on information provided the public.

As far as can be determined, no credible or even plausible evidence for any of these claims has been presented by the Bush administration, let alone by any independent verification of such claims. Instead, in the pattern similar to the disinformation campaign before the invasion of Iraq, questions about these claims, when raised at all, are ignored or "answered" with repeated or additional claims. Essentially this disinformation campaign, as all such campaigns, is an elaborate set of lies to deceive an enemy, in this case the Unites States Congress and the American people, in pursuit of Bush administration secret policy objectives for the benefit of a foreign government.

Campaign's Origin

The origins of this disinformation campaign was the the Bush administration's appreciation in the late summer of 2007 that the National Intelligence Estimate (NIE) subsequently released in November 2007 would undermine its attempts to claim Iran was developing nuclear weapons, the then primary justification for an attack on Iran. When it became clear to the Bush administration that the intelligence community would issue the 11/7/07 NIE, completely undermining the administration's claims of Iranian nuclear weapons development, they apparently decided, instead of accepting this judgment or objecting to it within official channels, that an alternative foundation needed to be established for its planned attack on Iran. This alternative would bypass not only the US intelligence community's collective assessments, but also the judgments of the United States' Joint Chiefs of Staff military command.

Essentially, the Bush administration, in cooperation with a foreign government, Israel, decided to bypass the intelligence community as well as the military commands of the United States, in order undertake attacks by US military forces on a foreign nation, Iran, by deliberately ignoring and undermining the judgments of authorities charged by law with informing the US Congress about such data so it can make sound judgments in exercise of its US Constitutional authority over matters of war and peace. Apparently the Bush administration hopes for a fait accompli after attacks on Iran, leaving the next administration with a region-wide tar baby, with Israel the only remaining "friend" in the region, otherwise populated with outright enemies or alienated former allies.

In addition, a likely last minute Israel-Palestinian peace deal negotiated with the unelected Fatah based faction, in which Israel would be granted costly long term aid and security assurances, in exchange for Israeli commitments of limited value and voracity. With Israel positioned to attempt an alliance with the Kurds upon the expected partition of Iraq, following an inevitable US withdrawal. Again, as with the invasion of Iraq, the Bush administration's planning is front loaded, focused on the mechanics of military operations or manipulating public and official opinion, with little or no thought given to what happens next, let alone second or third order consequences, except the general intention to take maximum political advantage of any resulting crisis.

On the face of it, some elements of the Bush administration's undertaking appear to be acts of treason, by giving aid and comfort to an enemy of the United States, in as much as it aided Israel to act in its own interests and without regard for, or to the detriment of, the manifest interests of the United States; however, we defer such judgments to another, more appropriate venue, and only pursue our limited assessment of the administration's actions with regard to their immediate objectives.

First Overt Act

The first known overt act in pursuit of this effort, besides Israel's attack on Syria, was a letter Bush wrote to the North Korean leader Kim Jong-il, as reported by the BBC on December 6, 2007, wherein Bush asked the Korean leader to reveal any assistance to others in the development of nuclear weapons. While a matter of speculation, this letter combined with other demands by the US government, were meant to pressure the North Korean government into making accusations against Syrian and Iran, in exchange for concessions in the form of released impounded funds and oil shipments promised as by part of the US-North Korean agreement on its weapons development program. According to the NYTimes Dec 15, 2007 report, Bush wrote a letter to the North Korean leader demanding, among other things, he reveal who he have helped with his nuclear technology, as specified in the nuclear declaration or so-called "come clean" section of the US-North Korean agreement.

Because the usual glacial movements of North Korea's foreign policy were incompatible with Bush administration's Iranian timetable, attempts were made to pressure North Korea to give in sooner to US demands by the end of the year, but as U.S. Will Hold North Korea to Nuclear Commitments by Reuters 01/03/08 reports, these efforts failed thus far. Instead, North Korea made a forthright statement, North Korea Says Earlier Disclosure Was Enough by The New York Times 01/05/08, which repudiated such claims. Since this was contrary to Bush administration objectives, it was apparently largely ignore by US corporate media. Pressure continues on North Korea to make such admissions.

Change of Policy

Overall, it appears the sudden US agreement with North Korea, after years of the usual "Bush diplomacy" whereby he refuses to speak to the other side until they concede every major point of contention, was an attempt to clear the decks for attacks against Iran. Among the most informed and insightful observers of national security affairs, Seymour M. Hersh, in a video interview at The New Yorker, suggested that a US agreement with North Korea would be among the clearest signs of US preparation for an attack on Iran. He further discusses, in an interview with Al Jazeera on Feb 7, 2008, US intentions and the likelihood Cheney may have overrode US Joint Chiefs of Staff objections to the attack.

As part of the administration's disinformation campaign, Israel attacked a Syrian site, which was later linked to North Korea through a set of stories released over time to give the impression of information being slowly revealed over time, hoping to establish "facts" more firmly than making accusations at the time of the attack on Syria.

US Corporate Media's Role in the Nuclear Weapons Development Story

It appears that certain media outlets were a party to the disinformation campaign, in that they misled their readers and others with stories clearly designed to establish the impression that North Korea was helping Syria, and likely Iran, to develop a nuclear program, to be conveniently confused in the public's mind with the far more costly and complex development of nuclear weapons. Among those noted, Harretz, the Washington Post and New York Times appear to have been willing conduits of this disinformation campaign, since it would strain all credulity to believe they themselves were deceived, especially since no effort was made to report on other observers who question the validity of these claims:

Israelis ‘blew apart Syrian nuclear cache’, Sunday Times, Sept 16, 2007

Israel, U.S. Shared Data On Suspected Nuclear Site, Washington Post, Sept 21, 2007

Israel Admits To Sept. Air Attack In Syria, CBS News Oct 2, 2007

Israel Struck Syrian Nuclear Project, Analysts Say, NYTimes Oct 14, 2007

Photographs Said to Show Israeli Target Inside Syria, Washington Post Oct 24, 2007

North Koreans said killed in IAF strike on alleged Syria nuclear reactor site, Harretz Staff and Reuters, Apr 28, 2008

It should be noted: All of these ginned-up, hand ringing stories about programs "to develop the capability; to learn technologies; to establish potentials for securing; etc.," not once mention that Israel is armed with several hundred nuclear warheads, some of which are aboard submarines capable of attacking Europe, Russia and the US.

A New Casus Belli: "Iran Is Killing US Troops"

The Bush administration has augmented and subordinated the nuclear issue and naval incidents as casus belli to the "Iran is killing US troops" propaganda offensive, which immerged with the invention of the so-called "Special Groups" by the US military command, first mentioned by the US Military Command in Iraq on July 2, 2007. They took on new life at the end of March 2008, as reported by Agence France-Presse (AFP) on March 26, 2008, when military spokesman Major General Kevin Bergner, as part of the US Military's effort to "document" Iranian sponsored operations in Iraq, revealed these "Iranian-supported Special Group criminals" were apparently and suddenly everywhere.

Within a month, hundreds of stories in the US corporate media reported all about these "Special Groups", almost without exception identifying them as Iranian trained and fielded. The NYTimes reported by April 24, 2008 that, "73 percent of fatal and other harmful attacks on American troops in the past year were caused by roadside bombs planted by so-called 'special groups.'” according to "Senior officers in the American division that secures the capital." As far as can be determined no credible or even plausible evidence for such groups has been presented by the US Military command in Iraq. Clearly, weapons stamped with Iranian manufacturing labels, while subject to counterfeiting, would mean little, even if genuine, in as much as such small arms are trafficked throughout the Middle East and indicate nothing about the actions of the government of Iran. Instead, in a pattern similar to the run up to the invasion of Iraq, questions about these claims, are ignored or met with additional claims.

By the time General Petraeus and Ambassador Crocker testified before the US Congress in early April, the "special groups" were an established element in the alternative reality maintained by official Washington and US corporate media. In addition, the ever compliant Congress allowed the two to testify for just a single day before the Senate and another day before the House committees in a mockery of oversight, during which not much was made of the question as to whether these claims about "special groups", even if true, legally justified attacking Iran under international law.

It is highly likely arrests of "Iranian agents" and weapons store seizures of "Iranian weapons" will continue, along with "counter infiltration" operations along the Syrian and Iranian borders.

The New York Times Particularly Duplicitous

The New York Times in particular, after its public vows to do better following exposure of its reporter Judith Miller, who made a significant contribution the "Weapons of Mass Destruction" disinformation campaign run out of Cheney's office prior to the invasion of Iraq that ultimately proved to be totally false, now seems to have slipped back into its old habit of blatant pro-Israel coverage and disinformation, while objecting in its editorial page to the very policies it advances in its reporting, making its practices especially duplicitous and irresponsible, given its undisputed influence both on official Washington and the rest of US corporate media.

In another example, a NYTimes Apr 26, 2008 article "Questions Linger on Scope of Iran’s Threat in Iraq" that nominally purports to question the US claims about Iranian/Iraqi "Special Groups" and Iranian involvement in training and arming fighters in Iraq; in fact, reinforces such claims using "directly or indirectly quoted unnamed officials an astounding 30 times," according to an insightful analysis of the article by Jeff Huber "When Did Iran Start Beating Its Wife Again?". The importance of the "Special Groups" claims is clear in that the Bush administration has shifted part of justification for a war with Iran to the charge that "Iran is kill US troops in Iraq", adding to this to its "warnings" about naval incidents in Persian Gulf and nuclear weapons development as Casus Belli options.

Recent encounters involving US and Iranian naval vessels show a evolution toward a much more aggressive and manipulative posture in the Bush administration's characterization of these events. The widely reported incident between US and Iranian vessels on January 6, 2008 in the Strait of Hormuz was actually the third such recent encounter. The first two encounters occurred in December 2007, during one of which on December 19, 2007 the USS Whidbey Island fired warning shots toward an approaching Iranian vessel, causing the Iranian vessel to alter course. The first two encounters passed unreported at the time and were largely routine for the area of operations.

However, the third encounter on January 6, 2008 was not only characterized as a far more grave "incident" by official Washington, accompanied by reports by official US sources of threats made against the US vessels, based on video and voice transmission "evidence" released by the Pentagon to vast coverage by US corporate media. Examination of the voice transmission recordings indicated the actual segment containing the only threat was of doubtful authenticity; and, a later release of an Iranian video of the same incident indicated the Pentagon had mischaracterized its own video, revealing another blatant disinformation effort, but received little coverage in US corporate media.

Another two naval incidents have been hyped by US corporate media, one in the Persian Gulf where a US military chartered cargo vessel, Western Venture, fired warning shots at approaching unidentified small boats without known injuries or damage. While the media attention added to regional tensions and increased oil prices, the incident was much like the other incident at the entrance to Suez Canal, except in that case a boat borne local vendor was shot to death by personnel aboard a US military chartered vessel Global Patriot. Needless to say the dead vendor was of little note in US corporate media.

Finally, the Accusations and Warnings

Perhaps the most transparent effort to link the alleged Syrian and North Korean reactors is the Apr 25, 2008 report in the BBC, which included pictures provided the CIA that "said to have been obtained by Israel - showed striking similarities between the Syrian facility and the North Korean reactor at Yongbyon, the US said." The report goes on to note: "The CIA briefing and statement coincides with the end of a two-day meeting between US and North Korean officials on Pyongyang's nuclear programme, which both sides say have gone well - fuelling speculation that a deal may be imminent." What this "deal" is remains to be seen, but bribes paid to a foreign government (North Korea) in exchange for accusations against another foreign government (Syria), in order to justify claims against a third foreign government (Iran) are hardly the stuff upon which grave policy decisions (going to war with Iran) should be made. Unless your objective is to lead the US into yet another war no matter what the facts actually are, as the Bush administration and Israel appear to be trying to do.

Finally, we have Bush himself taking the money shot in the Israeli press, with a truly bizarre parlaying of the accusations against Syria into a warning to Iran: Bush: Revealing details of attack on Syrian site was message to Iran, in a Haaretz Staff and Reuters, Apr 29, 2008, stating that "U.S. President George W. Bush said yesterday he released U.S. intelligence about the nuclear facility that Israel bombed in Syria in September so as to put pressure on North Korea and send a message to Iran that it could not hide its own nuclear program." Apart from the fact that a nuclear reactor is not proof of a weapons program in Syria, Iran is not Syria, any more than Saddam Hussein had anything to do with the 9/11 attacks on the US.

These Bush "warnings" have become a mainstay of US corporate media, in which often baseless threats against others are portrayed as "last, best efforts" to change alleged behavior before action is reluctantly taken, after giving the ever-preferable "diplomacy" a chance. The most blatant example of this is the number of times Saddam Hussein was "warned" about "weapons of mass destruction" and we were all warned about not letting the "smoking gun being the mushroom cloud" as well as warning about his final chances to "come clean." The added virtue of "warnings" is they contain an embedded assertion that the warned party knows full well the truth of the accusation as does the one issuing the warning, as well implying a reasonableness in that the target need only comply to avoid getting what they would otherwise deserve.

Should North Korea finally agree, at likely unknown cost, to "come clean" and mention help to Syria or Iran, such bribery is likely to be no more credible than confessions of tortured prisoners in the Bush administration's special prisons, whether they be "Iranian Agents" or "Terrorists" turned over to US authorities as part of the US's far flung bounty programs. After all, we have all become prisoners to the attendant lunacies of the Bush administration and US corporate media's alternative reality, in which new "warnings" based on disinformation lurk: hair-trigger "facts" poised to "provoke" the US into "defending" itself by attacking Iran, including nuclear program/weapons development; "Special Groups" killing US troops in Iraq; and, hostile naval incidents. By the time time the attack on Iran comes, the US corporate media will be asking why it took the US so long to "react."

Torture and Madness at Guantánamo Bay

When the "trial" of Salim Ahmed Hamdan begins at the Guantánamo Bay detention facility, the prisoner may be incapable of working on his defense. Why? According to his lawyers, Hamdan has essentially been driven insane by solitary confinement in a tiny cell where he spends at least 22 hours a day, goes to the bathroom and eats all his meals. His defense team says he is suicidal, hears voices, has flashbacks, talks to himself and says the restrictions of Guantánamo "boil his mind." (William Glaberson, "Guantánamo Drives Prisoners Insane, Lawyers Say," International Herald Tribune, April 26, 2008)

Facing life imprisonment on charges of "material support for terrorism," Hamdan is accused by Bushist military inquisitors of "aiding and abetting" terrorist attacks around the world by virtue of having once been employed as bin Laden's chauffeur and sometime bodyguard.

Hamdan's lawyers have asked a military judge to stop the "trial" from going forward until their client is placed in less restrictive conditions.

During a preliminary hearing Tuesday, Hamdan attacked the proceedings and asked to address the military's trial judge, Navy captain Keith Allred, The Washington Post reports.

Hamdan told the judge he would boycott the proceedings and bar his appointed defense team from representing him, on grounds that the military commission process is a sham concocted by Washington. He railed against the lack of humanitarian rights at Guantanamo Bay, the lack of access to the news media and to human rights groups.

"I would like the law, I would like justice. Nothing else. Just try me with the law and with justice," Hamdan said through an interpreter, a smile creeping onto his face. "I will tell you at the end, thank you." (Josh White, "Guantanamo Detainee Rejects Court Procedure," The Washington Post, April 30, 2008, Page A04)

Conditions at the Guantánamo gulag are more desolate and isolating than those on many death rows and maximum-security prisons in the U.S. Insanity-producing isolation however, is precisely the point. Part and parcel of their illegal detention by their Pentagon and CIA masters, Guantánamo detainees, when they are not subjected to "enhanced interrogations" (torture) are confined in 8' by 12' pens completely cut-off from the outside world.

As if to drive home the point, Hamdan's attorneys describe how the alleged "terrorist" has received but two phone calls from his family and no visits -- in six years.

Hamdan's case is significant in that the U.S. Supreme Court, hardly a bastion of weak-kneed liberals and al-Qaeda appeasers, used an earlier case to strike down the Bush regime's first military commission system in 2006.

According to attorneys for the detainees, under the regimen established by retired Major General Geoffrey Miller of Abu Ghraib "fame," the effects of intense isolation have transformed the prison camp into a "highly fortified mental ward," Glaberson writes.

But just for kicks, what do the "masters" of psychological torture, the CIA, have to say on the topic of isolation-induced regression in the "resistant source"?

There are a number of non-coercive techniques for inducing regression. All depend upon the interrogator's control of the environment and, as always, a proper matching of method to source. Some interrogatees can be repressed by persistent manipulation of time, by retarding and advancing clocks and serving meals at odd times -- ten minutes or ten hours after the last food was given. Day and night are jumbled. Interrogation sessions are similarly unpatterned the subject may be brought back for more questioning just a few minutes after being dismissed for the night. ... A subject who is cut off from the world he knows seeks to recreate it, in some measure, in the new and strange environment. He may try to keep track of time, to live in the familiar past, to cling to old concepts of loyalty, to establish -- with one or more interrogators -- interpersonal relations resembling those that he has had earlier with other people, and to build other bridges back to the known. Thwarting his attempts to do so is likely to drive him deeper and deeper into himself, until he is no longer able to control his responses in adult fashion. (KUBARK Counterintelligence Interrogations, C. Techniques of Non-Coercive Interrogation of Resistant Sources, Regression, July 1963)

But what of the "resistant source" who has been subjected to years of a harsh regime of reverse-engineered SERE tactics, exploited by "skilled" interrogators and their sorcerers' apprentices, the mercenary or military psychologists who do Washington's bidding?

According to Glaberson, prosecutors have argued that the manner in which Hamdan is being held does not constitute solitary confinement in part because "'detainees can communicate through the walls'."

But psychoanalyst Stephen Soldz, a fierce critic of the Bush administration's torture regime and of the collaborative role played by psychologists in U.S.-sponsored war crimes, is harsh in his condemnation. Soldz writes,

The literary genre of prison memoirs from Stalinist concentration camps among others is full of accounts of people able to "communicate through walls." Never before have I heard a claim as brazen as that this flaw in the system of total isolation did not make being locked up alone for years on end in an 8' by 12' cell for 22 hours a day "solitary confinement."

This article does not even mention the existence of another "camp," the super-secret Camp 7 the existence of which was only admitted by the military to the Associated Press last February. While details about conditions at Camp 7 are unavailable, we can only assume that they are even more brutal than those at Camps 5 and 6 that are described in this [International Herald Tribune] article. (Stephen Soldz, "Isolation driving Guantánamo detainees insane? Will APA act?" Psyche, Science, and Society, April 26, 2008)

Let's be clear: extreme isolation, sensory deprivation and other horrors are not incidental to the Guantánamo "experience." On the contrary, such abominable methods are central to the America's torture program. This point was driven home last November when Wikileaks published the primary operating manual for running the U.S. detention facility at Guantánamo Bay. It reads, in part:

a. Phase One Behavior Management Plan (First thirty days or as directed by JIG [Joint Intelligence Group]). The purpose of the Behavior Management Plan is to enhance and exploit the disorientation and disorganization felt by a newly arrived detainee in the interrogation process. It concentrates on isolating the detainee and fostering dependence of the detainee on his interrogator. During the first two weeks at Camp Delta, classify the detainees as Level 5 and house in a Maximum Security Unit (MSU) Block. ...

b. Phase Two Behavior Management Plan. The two-week period following Phase 1 will continue the process of isolating the detainee and fostering dependence on the interrogator. Until the JIG Commander changes his classification, the detainee will remain a Level 5 with the following:

(1) Continued MSU

(2) Koran, prayer beads and prayer cap distributed by interrogator

(3) Contacts decided by interrogator

(4) Interrogator decides when to move the detainee to general population.

Forty-five years after the CIA's KUBARK Counterintelligence Interrogation manual was first disseminated throughout the U.S. intelligence "community" one can only conclude, as did Salim Ahmed Hamdan, when he addressed judge Allred Monday: "My question is, the animal has rights or not? But the human being doesn't have rights?"

Perhaps 60% of today’s oil price is pure speculation

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. How?

First, the crucial role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil—West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.

WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it's also a key benchmark for US production.

‘The tail that wags the dog’

All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”

With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”

Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?

They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.

Enron has the last laugh…

As that US Senate report noted:

“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.” ¹

Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.

The CFTC opens the door

Then, in January 2006, ICE Futures in London began trading a futures contract for

West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in

the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.

A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.

In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.

By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”

The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”

Hedge Funds and Banks driving oil prices

In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”

The large purchases of crude oil futures contracts by speculators have, in effect, created an

additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Perhaps 60% of oil prices today pure speculation

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

By purchasing large numbers of futures contracts, and thereby pushing up futures

prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.

Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”

Dollar and oil link

A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”

For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.

Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.