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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.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek,, or The McGraw-Hill Companies.

Reader Comments

Pat O

Speculation isn't the whole story, but it is contributing to the current problem. This isn't just an argument about economic theory; we have a national security interest in a stable oil market. As a nation, we are expending tremendously to create stability in the oil-producing Middle East. It makes perfect sense to me that we also attempt to stabilize the market for oil as a commodity.

I think that the issues that have developed in the housing market and banking would be enough for everyone to realize that totally unregulated markets as essential as oil it to our country, and for that matter the world, make little sense.

Some control is necessary for stability.

Dave H

Re: Pat O

Yes but how do you regulate the market for an internationally necessary commodity?

I think passing regulation that encourages consumer-owned petroleum co-ops that set price based on actual costs is a better solution. They would operate concurrently with the for-profit companies who can still use the futures market. As a requirement for non-profit status, in exchange for the favorable regulatory treatment, the co-ops would devote a portion of sales revenue to go to R&D to get us off of petroleum and the accompanying pollution. There will also need to be a moratorium on lawsuits that prevent new production and refining capacity as well (for all oil businesses) for national security reasons.

Let's compromise and work together to give everyone what they need. The environmentalists are not going to allow increased production unless there is a plan to get off oil. The capitalists are not going to agree to restrictive price controls, but they could go along with a system of competitive non-profits, which could help ensure lower energy and product costs domestically to help us compete globally.

There are ways to get creative and make everyone happy and fix our woes. We have the resources, technology, and workforce necessary to do so immediately. Demand this attitude of your lawmakers.

Timothy F.

I think if you were to make public the millions the speculators have made in the last eight months, the everyday American would be shocked to find out that is one of two reasons for the high prices. The other: Producers control the flow in the refineries.


Guys, get a clue. The economists have studied this to death. Speculation may cause the price to increase or decrease faster or slower, but it will never dictate the price. There is a reason it is called the futures market. The price is determined by the supply and demand, and the futures sell based on what people think the market will do in the future. If there is less supply than demand, like during the spike, the price will rise regardless of any bets on what it will do in the future. The only thing that might be happening with the futures is an increased reaction to where the market was going anyway. The only way to solve the energy problem is to get government the heck out of the private sector's way and let the markets find there own alternatives.


Well (whatever) on all the comments here; everyone has an idea what the problem is, but nothing is getting done and it will probably never get done. Nobody wants to take the blame. This will be an issue for a long time, whatever the reason is. Somebody is getting rich off us. One thing you will see is that people eventually will get used to paying $3.50 or so a gallon, and then the big hype will slowly disappear over oil prices.

So do you really think that anything is going to get done about it? If so, then the big question is, who will get it done?

Funny thing: As oil price went up every day, gas prices went up as well from 5 cents to 10 cents a day. Now as oil prices go back down, gas prices are only dropping 1 to 2 cents.


These darn speculators are driving the price of oil down. Pelosi and Obama should drag them in front of Congress and demand that they stop speculating so that the prices can return to the high $140s. This will teach conservatives that government intervention in commodities works. Wait, I think I am having what alcoholics refer to as a moment of clarity. The market, contrary to popular belief, is working without the government and because of speculators. Democrats, please never let this information out in the public--it will ruin us.

Paul Dewberry

Speculation is fine. Paper speculating is not. Get rid of any speculators who do not intend to take possession of the oil or have not the ability to do so, and the price will only go down.

Speculation, speculation, speculation:

1) Due to strategic necessity, the U.S. should be pumping every last drop of oil out of the ground, even storing it in federally subsidized containers. We have hundreds of years of oil in Alaska, the Gulf of Mexico, and domestic shale. Before we are able to switch to alternatives, we should make every move to switch to an all-domestic source of oil.

2) The U.S. consumer should maintain every last one of their gas sipping habits. If demand fluctuations still exist, let us drive the price of oil into the ground (pun?). Let every terrorist nation suffer a significant cash flow problem. That is all good.

3) Let us start using every alternative no matter what it costs, again, for strategic reasons.

4) Once we have switched over to alternative fuels, perhaps we can use only domestic oil and not import any of it.

5) Unfortunately, the above plan means complete instability in the Middle East as their primary cash flow dries up completely. However, I suggest we stick to the plan.

Roger Macdonald

Everyone is missing the point of the good or bad about speculators. Yes, the speculators drove the price of oil up and yes, the speculators are driving the price down.

What everyone is missing here is, why on earth do we as society allow the speculators to bring our economy to it's knees and then make money while they drive the price down, too?

Look at what's happening now. A war in Georgia that threatens a pipeline carrying almost 1 million barrels a day, a fire in another major pipeline in Turkey, and the price is going down. A month ago, the Wall Street banks (read speculators) would have driven the price up in a New York second, but since they are a bit worried about finally being regulated again, they want out of the market and are taking their money and going else where.

Deregulation didn't work for the savings and loans in the 1980s, didn't work for the banks in the 1990s, and didn't work too well for the commodity markets over the past eight years.

Commodity markets are not places to hedge against inflation, hedge against a falling dollar. They are for end users of the commodity to smooth out and lock in a price of the commodity, so a business can plan on what it is going to cost to do business down the road a bit.

Next time someone says, "Let's deregulate this market," hang on to your wallet, because someone wants to pick your pocket.

Wayne Dusek

Speculation absolutely increases the swings in price. All I have to do is sign a piece of paper, and I can participate in the oil market at a huge leverage. The futures markets were designed to reduce the annual fluctuations in commodities such as crops and "pork bellies," which they perform effectively. There are no annual fluctuations in commodities such as oil, so these items should not be allowed to trade at all unless the trading parties have the capacity to make or take deliveries of the product traded.

munidas pereira

Speculation can only be responsible for short-term moves and wild swings. In the long term, the supply-demand balance has changed. To illustrate my point: In the 1950s, when the Iranian nationalist Mossadegh wanted to take over Iran's oil, the users boycotted Iranian oil, and there were no buyers for the product. This led to financial problems for Iran and the fall of Mossadegh. Today that situation is unimaginable as the demand is very close to supply.

Munidas Pereira, M.B.A., McGill


Like everything it touches, Wall Street's unbridled greed gets out of control, in search of ever bigger bonuses for the creeps at the top. Nothing wrong with hedging, for transport, agriculture and such, but like their Senator, they believe they are entitled to it all. After the election, when you twits send the same jerks back to Washington, D.C., you'll see your tax dollars bailing out Hellary's supporters on Wall Street. After this election, they'll continue with business as usual; Wall Street gets the prime fillet with all the fixings, and you get the bill.

PNW Trojan

We will never be independent of foreign oil; too many quid pro quo obligations and "national security" issues, which have nothing to do with our own security, just more political horse droppings, much like Alaskan oil was never to be sold elsewhere--and it is. As would ANWR, California, Florida, Martha's Vineyard oil--unless a President, or his party boss, has a home there and doesn't want to see the ugly "Christmas trees" or their toxic spills. 98% of our problem is our political stooges in D.C. Our industries pay too much to them, to ever "have" to become wise, profitable, and green.

Srinidhi Prasad

There is a problem in supply and demand indeed. Hence, we are observing a constant high rise and if at all a fall, a very small fall in the price of oil from the past almost couple of years.


When oceans of money enter a system, when there is no limit to the amount of new cash that continues to enter the system, then everybody wins if the price keeps going up. Include long only index funds and prices being biased upward are institutionalized as long as new money keeps coming in. Basically, this is a Ponzi scheme, only legal. At this time, money is leaving the system, causing the Ponzi bubble burst being experienced today. I can understand why the oil liars would proclaim that high oil prices are only supply and demand, but I am astounded that so many people actually believe them. Regarding the argument that supply and demand are in balance and higher prices are a result of increasing demand, well surprise. Basically, all producers in every item try to match supply and demand. This is called "efficient inventory management." And it is especially true if the carrying costs of excess inventory are high. Why are so many people confused by commodity hustlers?


Have you noticed that the price of oil has gone from $147 a barrel on July 17 to $116 a barrel today? McCain said the price reduction was caused by Bush approving offshore drilling--wrong. There has been some reduction in demand from China trying to clear their air and the U.S. driving less; however the major reason appears to be speculators knew Congress was putting pressure on the CFTC to perform better oversight.

Senator Maria Cantwell (D-WA) is going to introduce a new bill when Congress comes back from vacation. New information has surfaced that speculators have been having a major effect on gas prices, and supply and demand has not been the reason for the huge price increases.

Revised data show speculators controlled nearly half of NYMEX oil futures. CFTC data also reveals one trader controlled 10% of oil futures on exchange

(Reuters)—A quiet data revision that has boosted by nearly 25% the number of oil futures contracts U.S. regulators think are held by speculators. And that revelation is raising eyebrows in the energy trading community.

The revision means that speculators controlled 48% of the open interest in NYMEX crude oil futures and options as of July 15—compared with just over 38% under the previous classification.

“That’s huge when you look at the numbers,” said Phil Flynn of Alaron Trading in Chicago.

“It changes the whole way you look at the recent moves in this market.”

Senator Cantwell: Regulators asleep as speculators manipulate oil markets, August 06, 2008

Like just about every American, U.S. Sen. Maria Cantwell wondered what was behind the spiking oil prices that have inflicted so much pain at the pump this summer.

So she called Robert McCullough Jr., the Portland economic consultant and former Portland General Electric executive who helped unravel Enron's manipulation of western energy markets in 2000 and 2001.

As it happened, he was already on the case.

The likely cause, McCullough concludes in a report he released Wednesday, has nothing to do with supply or demand.

The only correlation they found was that during debates in Congress on making commodity traders more transparent and accountable, oil futures prices fell. (CFTC was told to do their job, and SEC is investigating several investment banks that were doing most of the speculation)

“We are hearing that supply and demand is the culprit, but we know we are missing a federal cop on the beat,” Cantwell said. “I am calling on the Commodities Futures Trading Commission finally to do their job and shine a bright light on dark trading practices to stop excessive speculation in the oil markets.”

Greg Turner

I am amazed how so many "educated" folk have an opinion on this subject but have yet to do any real research into the matter. The Wall Street firms that have caused the hiatus have hired their share of hired guns from universities in--guess where--Texas, to say that the extreme price runups are s/d driven. But, if you had looked closely at the situation as Mike Masters, HG, and I have, you could easily see, as the Big Oil executives and the Saudis have maintained, oil should, even with the dollar devaluation premium in the spring of $25, not be trading above the mid-$80's. The extraction-to-market price was about $60 average worldwide. Where were the physical global shortages of oil that such a supply problem and high price would indicate? There weren't any. It was all the mind of the investor--the new asset commodity class/index fund Investor that was wooed so successfully by the "golden boys" and their sidekicks at "The Stanleys" who convinced them to start pouring money into index programmed commodity plays back in mid-June. The influx of money in commodities, the "only game in town," starting in mid-2007 and culminating in mid-June 2008, simply pushed the prices to market/economy, then demanded breaking limits. But, ah, they were pushed and "pulled," or shall we say, "led" by those brilliant and self-fulfilling prophecy--"analyst reports" that their pundits were obligated to broadcast. They even have that famous political group, that loves Big Oil and Wall Street, and even has the guy who ran the company that invented the whole Commodity Index Fund Concepts and the term "passive Long Investor"--who is now our glorious top money man, to promote the idea that it wasn't the Wall Street firms that ginned up this mess--"It just had to be supply and demand." That was simply all it could be. Yeah right. Excessive speculation does fit in with our last minute effort to pay back Big Oil and support drill, baby, drill. Also, there just may have been some violations in all this, but, no--these guys got protection, so the CFTC was ordered to look for some other culprit--and they finally decided that they couldn't decide that all that cornering of some 30% of the entire oil market in mid-June by about three firms was just not so, because "we can't really see 'all their holdings' the ICE, OTC, and most important, the "swaps" were just not available to them. Yeah, right, again.

Let's wake up folks--we done been had, and the world economy is crashing--we are illiquid, and many are in much pain, to include starvation, from all this greed. Hopefully the FTC will step up and put the pieces of the puzzle on the table and see just what all went on.

Well, the real litmus test is this: Look how fast the market fell once the Congressional and public light began to shine on the passive long investor/CIF possibilities in mid-June. As they saw their other portfolios crashing and decided "maybe this just ain't such a great thing" like they were told. Then really, there hasn't been that much "physical demand destruction." There has just been that much "video barrel demand destruction." This ain't hard, folks.


Could someone please explain to me how futures contracts and the speculation that is inherent in them allow prices to be manipulated? I am not at all familiar with the causal mechanism between the two, but I love learning and would be delighted to have someone explain clearly the relationship between speculation via the futures market, and the resulting change in price. Thanks very much for your time and help.

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