Why your bank might own an oil tanker

Oil tankers arrive at Grangemouth oil refinery.

Why on Earth would a big bank own a tanker full of oil or a warehouse stacked with metal? That’s the question a Senate hearing and numerous articles asked Tuesday.

Big banks’ dealings in the commodity storage business may sound like the most esoteric of financial esoterica. But it’s an issue that potentially affects all Americans, down to the price of gas fueling their cars and the electricity powering their homes. The Senate hearing drilled down on the cost of a humble can of beer.

“It has cost MillerCoors tens of millions of dollars in excess premiums over the past several years and billions to the entire industry, with no end in sight,” began the testimony of Tim Weiner, the brewer’s global risk manager for commodities and metals.

Weiner says other beverage companies -- heavy hitters like Coca-Cola and Dr. Pepper Snapple -- share his frustration with a system where banks hold raw materials like aluminum. He also mentioned the complaints of aluminum foil makers Reynolds and metal manufacturers Novelis and Ball. Some of that added cost winds up in the price tag of things we buy every single day.

“Banks are doing this to make money,” says Duke University finance professor Campbell Harvey. “Somebody’s gotta pay the price. When the banks get injected in the middle, it makes sense that the cost increases.”

The issue isn’t banks trading commodities through complex Enron-style deals. They actually have warehouses stuffed with metal and tankers full of oil. Critics say banks are using these facilities to choke supply, which jacks up prices.

Banks say they’re just doing with commodities what they’ve always done with money, keep it safe for the owners until they need it. Storing raw material is also a way for banks to hedge their bets, providing income during economic downturns.

“Storage facilities in commodities tend to be one of those kinds of assets that can actually perform well during the down part of an economic cycle,” says University of Houston professor Craig Pirrong, a commodities expert. “That’s when storage facilities make their money.”

Bankers deny they’re manipulating markets and point out that they’re playing by the rules. But with powerful industries lining up against them and regulators taking a fresh look, the rules may change.

Kai Ryssdal: And whaddya know but Wall Street banks are in trouble again. Nothing exotic this time. No collateralized debt obligations or credit default swaps. That's sooooo 2008.

No, we're talking far more mundane things like metals and oil and electricity. You'd be well within your rights to ask what exactly those have to do with banking. Which is the point.

Today the Senate Banking Committee spent some time trying to figure out whether, say, Goldman Sachs ought to be allowed to own, say, aluminum warehouses or ships that transport oil. Marketplace's Mark Garrison gets us started.


Mark Garrison: It may sound obscure, but commodity storage could be affecting you right now, in the price of gas fueling your car and electricity powering your home. Or the can of beer cooling you off.

Tim Weiner: It has cost MillerCoors tens of millions of dollars in excess premiums over the past several years and billions to the entire industry, with no end in sight.

That’s Tim Weiner of MillerCoors testifying on the Hill. He says other companies like Coca-Cola share his frustration at a system where banks hold raw materials like aluminum. Some of that cost winds up in the price tag of things we buy every single day.

Campbell Harvey: Banks are doing this to make money. So when they’re making money, somebody’s gotta pay the price.

Campbell Harvey is a Duke finance professor. This is not about banks trading commodities through some complex Enron-style deals. They actually have warehouses stuffed with metal and tankers full of oil. Critics say banks are choking supply, which jacks up prices.

Harvey: When the banks get injected in the middle, it makes sense that the cost increases.

University of Houston professor Craig Pirrong doesn’t have a problem with what banks are doing. The commodities expert says storing raw material is partly just banks hedging their bets.

Craig Pirrong: Storage facilities in commodities tend to be one of those kinds of assets that can actually perform well during the down part of an economic cycle, and that’s when storage facilities make their money.

Banks say they’re just doing with commodities what they do with money, keep it safe for the owners until they need it. And they say they’re not manipulating markets, just playing by the rules. But with powerful industries lining up against them and regulators taking a fresh look, the rules may change. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter and substitute host for Marketplace, based in New York.

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