Oil Prices: Blame Speculators
Unrestricted speculation is what’s really responsible for the wild swings in oil prices, hurting motorists and economies the world over. Pro or Con?
Pro: Commodities Traders Are Running Amok
The whole economy is in a shambles, and the price of oil hit a record high on July 11, at $147.27 a barrel. Although prices have since fallen by more than $30, we are still paying around $1 per gallon more at the pump than we were less than a year ago.
Many observers are saying supply and demand is the only problem, meaning there are too many gas guzzlers and not enough oil to meet the world’s thirst. I disagree.
If supply and demand were the whole story—which has been asserted during recent testimony in Congress—oil should be no higher than $80 a barrel. So what’s the real culprit? Speculation.
Speculators have been feverishly buying oil futures—trades that can be entered with a small outlay of capital and a great deal of leverage—resulting in big profits and creating a false sense of demand that drives up the price per barrel.
No one knows how much speculation is occurring. A provision of a bill passed in 2000—which was pushed through by Enron lobbyists and which eventually led to the California Electricity Crisis of 2000 and 2001—ended U.S. regulation of the energy market. So speculators can trade oil futures freely without any supervision from the Commodity Futures Trading Commission.
In July, when the CFTC provided an interim ruling that speculation has not played a part in the increase in oil prices. If that’s the case, how does it explain why the price per barrel mysteriously dropped—despite no substantial change in supply and demand—the week congressional hearings took place to examine the possibility of speculation?
I suspect speculators eased up on their trading in order to look less guilty. If the CFTC were to start properly regulating these markets and provide transparency, oil prices could fall 25% from current levels—a drop cash-strapped consumers would surely welcome.
Con: Sorry—It’s All About Supply and Demand
Is this really a debate? In short, the growth in global demand for oil exceeds the global supply. As a result, the price rises. While there is increased trading in the oil market, there is no evidence that speculators have any influence over the rising price. (For a masterful, more in-depth look at the speculation myth, please see BusinessWeek Economics Editor Peter Coy’s story (BusinessWeek, 7/8/08).
The CFTC report released on July 24 clearly states: “Analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.” This report was written in conjunction with staff members of seven other federal branches. Rather than fault speculators, this task force—along with many others—blames fundamental economics.
Global gross domestic product has grown 5% annually for the past four years. This robust growth—the strongest in 20 years—requires oil. Unfortunately, there isn’t enough oil to keep pace with demand. Even with rising prices, demand for oil remains strong. For the past five years it has grown 1.8% annually.
The CFTC report continues: “World oil consumption growth has simply outpaced non-OPEC production growth every year since 2003.” Unfortunately, “since 2003, OPEC oil production has grown by only 2.4 million barrels per day while the ‘call on OPEC’ (defined as the difference between world consumption and non-OPEC production) increased by 4.4 million barrels per day. As a result, the world oil market balance has tightened significantly.” Thus, the price increases.
Leave the poor speculators alone. All they want to do is make a quick million bucks.