On July 11, 2008, the price of oil rose to $147 per barrel, a record high. Gas stations engaged in hot pursuit as the price of a gallon rocketed past $4. All hell was about to break loose.
The country's largest banks had already begun to implode through arrogance and ineptitude. Now the oil market had moved in with a thundering uppercut.
Airlines and trucking firms watched their costs punch through the roof. So did every other business great and small, since 90 percent of American goods are shipped in some form or another.
"That was the breaking point of the economy," says Tyson Slocum, director of the energy program at Public Citizen, a Washington, D.C. government watchdog group. "That's when businesses said they could no longer fuel their trucks, and that fuel costs were overwhelming their payroll."
So began a surge of layoffs that would push well into the next year.
America's political leaders could only muster a simpleton's response. Demand had outstripped supply, they claimed. And it was all the fault of radical environmentalists. If they'd only let us drill for more riches offshore — or on protected lands in Alaska – we could all go back to cranking Toby Keith in our Chevy Tahoes.
It was a fabulous, made-for-TV narrative. Who can forget Sarah Palin shaking her fist at the Republican convention, exhorting the legions to "Drill, baby, drill!" What began as a rallying cry soon became an article of faith at cafes and kitchen tables, executive suites and editorial meetings.
There was just one tiny problem: absolutely none of it was true.
In four short years, the price of oil had risen nearly 400 percent. For this to be a natural occurrence, it would have required a sudden, massive increase in world oil consumption – coupled with equally massive shortages in production. None of which had happened.
"I asked the senior official at Goldman [Sachs] at the time. There were no supply and demand issues that could remotely explain the doubling and doubling again of oil prices," says Dennis Kelleher, a former international securities lawyer. "In order to justify that, it would literally take the discovery of China on the demand side, or the loss of Saudi Arabia on the supply end."
And those politicians who were bleating about environmentalists? What they conveniently forgot to mention was that millions of acres had already been approved for drilling in the U.S., but remained untouched. The demand just wasn't there.
The boys on Wall Street must have had a hearty laugh over this. After all, they knew oil prices had ceased to have anything to do with supply and demand. Eight years earlier, they'd been granted the right to make huge, unregulated bets in the oil markets. Now they'd driven gasoline to the brink, just as they had with the mortgage industry.
The funniest part: All those finger-pointing politicians were their accomplices. This was an inside job.
A Senator Goes Whoring
It happened on the night of December 15, 2000. The country was in tumult over the Bush-Gore election. This diversion offered Republican Senator Phil Gramm of Texas an exquisite opportunity to push American financial stability back 100 years.
That evening, Gramm inserted a 262-page amendment into the Commodities Futures Modernization Act. Leaked emails would later reveal that it had been written by lobbyists for Enron, Goldman Sachs and the Koch brothers, Kansas billionaires who would later fund the Tea Party movement.
Gramm had turned his office into a subsidiary of Wall Street. From 1997-2002, the securities and banking industries had lathered him with $640,000 in campaign contributions. His biggest sugar daddies weren't from Texas; they were Credit Suisse, Morgan Stanley, Bank of America and Goldman. And he was more than willing to step-and-fetch-it on their behalf.
Big oil, big banks, and big speculators like the Kochs wanted to make monster bets in the futures markets. But they wanted to do it in secrecy – without any government regulation.
The futures markets are where the world trades its raw materials, from wheat to oil, coffee to cattle. They were designed not as toys for banks or speculators, but for merchants who actually use those products.
Before a farmer plants his oats in spring, he can agree to sell them to Kellogg's at a set price come fall, the same way Southwest Airlines can lock in a price now for a delivery of fuel in January. This allows companies to set their costs and income long-term, so their businesses – and their customers – aren't regularly blown up by wild price swings. Everyone has a stake in keeping prices stable.
Which is why futures had been heavily regulated since the 1930s, when Wall Street last incinerated the U.S. economy. Up till then, speculators had regularly terrorized the country by artificially driving up prices and hoarding things like grain.