The article talked about federal investigators looking into a Dutch-Swiss oil trader, Vitol Group.

The enforcement attorneys were trying to answer a big question: Whether or not oil speculators were behind the big price run-up this past summer — when oil approached $150 per barrel (today, oil hit $38 barrel).

The investigation by Commodity Futures Trading Commission potentially comes at an inopportune time for green investors. Green stocks began to shine with record-high oil prices. Although speculative-driven prices entered the dialogue, most experts blamed China, India, Russia and other booming emerging markets for consuming the world’s oil and gas inventories and driving up prices.

However, since hedge funds are largely unregulated no one really knows for certain the role they played (if any) in pumping up the price of oil.

The probe into Vitol may help answer that question — and determine the viability of green investments.

The Journal reported that Vitol’s trading contracts on the New York Mercantile Exchange at one point in July constituted 11% of all crude-oil bets outstanding on Nymex around the time oil was skyrocketing to new highs. The attorneys are now investigating if, in fact, the percentage of Vitol’s trading contracts were even higher than that.

If Vitol’s trade sufficiently “influenced” oil price fluctuations, some form of legal action could be pursued against the trader.

According to the Journal, Vitol made an estimated $1 billion to $1.5 billion on its record $146.7 billion in reported 2007 revenues, say traders familiar with the company. That works out to an average of $4.5 million to $6.8 million for each of Vitol’s 220 equity partners, although the top seven partners get a larger share of the spoils, the Journal said. Vitol reports its equity value at more than $5 billion.

An important distinction to make about Vitol’s trades is that they covered physical oil, not oil futures. By physical oil we’re talking about stockpiling oil shipments in tankers and other places, to keep crude off the market until Vitol could get its high price.

The Journal made sure that readers understood Vitol’s trading practices did not break the law — at least at this point in the investigation.

In August, though, Vitol emerged as the mystery trader that U.S. regulators reclassified as a large “noncommercial” trader — essentially a speculator, reported the Journal. Vitol’s trades helped reinforce the notion that indeed speculators were behind rising oil prices rather than OPEC and other producers.

This investigation could prove to be real bad timing for Vitol.

Under current SEC Chairman Christopher Cox, the agency has been lambasted for failing to protect investors from the current meltdown. President-elect Obama won’t make the same mistake.

His pick to head the SEC, veteran regulator Mary Schapiro, is expected to mop up the mess and restore confidence in the regulatory agency through new, strict guidelines.

She spent more than 20 years supervising financial markets. In her past position, she served as chief executive of the Financial Industry Regulatory Authority, a broker dealer watchdog. Schapiro has a stellar reputation for integrity and putting investors first.

What does all of this have to do with the price of green?

Well, that’s the big “What if?”

But here is how it could play out…

Schapiro digs up enough evidence to make a painful example of Vitol — and other traders like it. The backroom speculators are forced into the media glare, and pilloried for driving up oil prices.

At the same time, the economy bounces along the bottom and gas consumption stays relatively low.

Combined, these forces conspire to depress oil prices far longer than anticipated today — to the extent that OPEC’s supply cutbacks have only a negligible impact on spurring the price of oil at least here in the U.S.

Overall, this scenario is very bad news for green investors. Low oil totally crushes the economic argument for green technology.

Worse, if the economy remains sluggish for the next few years, the Obama camp could have a difficult time of imposing clean-air surcharges and penalties on American companies.

In the end, we believe that fossil fuels, and nuclear, will continue to reign in the coming years.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” U.S. economy, Fisher said during a Wednesday speech in San Francisco.

In a financial commentary titled, “With Oil Speculators Blitzing, the Fed Needs to Call an Interest-Rate Reverse Play,” Money Morning Contributing Editor Martin Hutchinson predicted that escalating inflationary pressures will force central bank policymakers to start increasing the benchmark Federal Funds rate – perhaps as soon as the two-day Federal Open Market Committee (FOMC) meeting that’s scheduled for June 24-25.

Although the article was datelined Wednesday, Money Morning’s articles are typically posted to the Web site the night before. And Hutchinson actually filed the article on May 21 – a full week before Fisher made his comments. Even before that, however, Hutchinson has repeatedly warned that inflation was becoming problematic: Back in early April, he even predicted that gold prices are headed for the $1,500-an-ounce level – again, due to inflationary pressures [Check out several of Hutchinson’s recent inflation-related research reports - one detailing profit plays stemming from higher oil prices, and the other looking at gold plays. Both reports are free of charge].

A move to boost interest rates would be a major story as well as a major turnabout for the U.S. central bank. After all, for nearly eight months the Federal Reserve has been engaged in one of the most aggressive rate-cutting campaigns in its history, having slashed short-term interest rates from the 5.25% level in mid-September down to 2.0% today.

The Fed Funds rate is the interest rate Fed-member banks charge for overnight loans to other institutions needing the cash to meet reserve requirements. Changes in that rate quickly affect borrowing costs throughout the U.S. economy, since commercial lenders are quick to adjust the so-called “Prime Rate” – and rates on other types of loans – in lockstep with changes in the Fed Funds rate.

Hutchinson, a longtime international banker and an expert on emerging-markets finance, said that as soon as he read the minutes from the April 29-30 FOMC meeting, he knew a near-term rate increase was likely. The two key reasons:

• The central bank had reduced its 2008 economic growth outlook from the range of 1.3% to 2.0% it issued back in January down to a new, lower 2008 growth estimate of 0.3% to 1.2%.
• At the same time, FOMC policymakers boosted their estimates for inflation – excluding food and energy prices – to a range of 2.2% to 2.4% this year, up from an earlier range of 2.0% to 2.2%.

According to Hutchinson, that double-whammy of lower growth and higher inflation leads to only one conclusion: Interest rates must head higher.

“Obviously, the Fed’s outlook on growth and inflation both changed,” Hutchinson said in a telephone interview from his Washington-area home yesterday. “There’s a lot of straw in the wind at this point.”

The April FOMC meeting minutes were released May 21; Hutchinson wrote his analysis and made his predictions later that same day. Prior to the release of the Fed minutes, there was almost no marketplace expectation of a near-term increase in interest rates.

Over the past few weeks, several other Fed bank presidents – including Thomas Hoenig of Kansas City and Gary Stern of Minneapolis – have displayed an escalating concern about spiraling pricing pressures. But Fisher, 59, is the only FOMC policymaker to “dissent” three times from decisions to lower the Fed Funds rate, Bloomberg News reported.

The minutes of the last policymaking Federal Open Market Committee (FOMC) meeting, released on Wednesday, showed that the Fed’s inflation forecast was raised from a range of 2.1%-2.4% to a range of 3.1%-3.4%.

Add the zooming oil prices we have seen recently into the mix, and the conclusion is inevitable: The nation’s central bank will soon have to reverse course and start raising interest rates – and probably in a hurry, too, if the Fed wants to keep oil prices on this side of the stratosphere.

That’s no small shift: After all, for nearly eight months the central bank has been mounting one of the most aggressive rate-cutting campaigns on record, slashing the benchmark Federal Funds rate from 5.25% down to 2.0%.

The Key Catalysts

Several factors have made it imperative that rates head higher. Let’s take inflation first. The consumer price index (CPI) figures for the last couple of months actually have been encouraging for the market. CPI has been coming in lower than analysts had expected. However, in both March and April, the downward seasonal adjustment was huge, far above the average adjustment for the past 10 years.

Thus, in March, a price increase of 0.9% (equivalent to 11.1% per annum) was revised down by the magic of seasonal adjustment to a mere 0.3%. Similarly, in April, an unadjusted 0.6% figure was seasonally adjusted down to just 0.2%.

It doesn’t require a super suspicious person to find that odd, especially during a period in which everyone’s worried about inflation. If the average March and April seasonal adjustment for 1998-2007 had been applied to the unadjusted figures, the annual rate of inflation for March and April would have been above 7%, instead of the 3.1% officially reported.

In any case, the producer price index (PPI) inflation is running at 6.5%, which suggests the CPI figure could experience an uptick very soon.

Either way, if the Fed thinks inflation will be above 3%, and the monthly figures come in above that number – let alone as high as 6%-7% – it won’t be able to keep the Fed Funds rate at its current 2.0% for long. The FOMC knows quite well that a Fed Funds rate lower than the current inflation rate will only serve to fuel inflationary pressures, and force the inflation rate even higher. If the Fed thought inflation was at 2%, it could justify keeping the Federal Funds rate at 2%; but now that the FOMC has acknowledged that it thinks inflation will be above 3%, it’s difficult to justify such a low Federal Funds target – something around 3%-3.5% seems more plausible, even if the United States is fighting a recession.

If monthly inflation numbers were all the Fed was worried about, we could expect the central bank to gradually ratchet the Fed Funds rate up to about 3% – or perhaps even a little bit higher. This deft initiative might get under way at the FOMC’s June 24-25 meeting, or might start at its Aug. 5 meeting, but either way, short-term rates would reach 3% by the end of this year, unless the banking system suffered another real disaster before then.

However, the oil markets have given the Fed something else to worry about.

Oil prices at $133 per barrel last Wednesday were up 60% from the $83 per barrel level on Sept. 18, 2007, the day the Fed began easing cycle for interest rates [oil prices punched through the $135-per-barrel level on Thursday before sliding back]. Other commodity prices have also gone through the roof during that same period. While U.S. monetary policy isn’t the only thing affecting global oil prices, which are dollar-denominated, it’s pretty clear that the Fed rate cuts and the central bank’s creation of money through bailing out the banking system have made an awful lot of money available for oil speculators.

And while hedge funds and sovereign wealth funds are reaping these massive windfalls, don’t forget the flipside of this equation …

This pricing petro-gusher is costing the United States real money.

The Suicide Squeeze Play

Since the United States currently imports about 9.4 million barrels per day, the $50 price increase since September has cost the United States $470 million a day. That’s $170 billion per annum, more than 1% of gross domestic product (GDP), or 22% of the current U.S. balance of payments deficit.

T. Boone Pickens, the octogenarian Texas oil legend, has emerged with a prediction that the price of oil could reach $150 a barrel by the end of the year. He points out that the world oil supply is currently at a maximum of 85 million barrels per day, while demand is 87 million.

There’s just one problem. There’s no way this supply shortfall of just 2 million barrels per day, or 2.3%, should cause oil prices to soar 60% in eight months – let alone another 15% before year-end as Pickens predicts. Rising prices should reduce demand and (to a lesser extent) increase supply. Economists differ by how much, but no economist I know of thinks the price elasticity of oil is below 10%: And at 10% elasticity, a 2.4% supply shortfall should push the price up 24%, not 60%.

So where does the other 36% come from – not to mention the additional price increases that Pickens is predicting?

It must be “artificial” – that is, created by speculators.

With U.S. interest rates below the inflation rate, betting that oil prices will go up is like shooting fish in a barrel – you can’t miss, provided only that you and your friends are together rich enough to control the market. And with all the extra money that the Fed has created just sloshing around, speculators are nothing, if not rich.

How do you stop speculators? You whack them with a two-by-four, that’s how. You get their attention with a shock move. You bring them pain by increasing their financing cost, you insert in their mind the idea that you might really mean it, and underscore that you might go on attacking them until their speculative run-up in oil prices is ended.

“We’re going to go right at OPEC,” she said. “They can no longer be a cartel, a monopoly that get together once every couple of months in some conference room in some plush place in the world, they decide how much oil they’re going to produce and what price they’re going to put it at,” she told a crowd at a firehouse in Merrillville, IN.

“That’s not a market. That’s a monopoly,” she said, saying she’d use anti-trust law and the World Trade Organization to take on OPEC.

The attack on OPEC and evil oil speculators is a powerful piece of posturing. But according to Doug Casey at CaseyResearch.com, Hill may not have such a high profile target for long, as analysts remain confused over the direction of oil.

This from Doug:

On the one hand, “It just doesn’t look like this market is getting ready to turn around and go down for a long term,” said Darin Newsom, of commodities information provider DTN. “The news in Iraq helps confirm there are still problems on the supply side.”

But on the other, “If the rally in the U.S. dollar index gains momentum and money begins to come out of crude oil, the bearish technical signal established this week could lead to a larger selloff ,” Newsom said.