Are speculators driving up oil and gasoline prices?

McClatchy NewspapersMay 29, 2008 

WASHINGTON — A key federal regulator said Thursday that it's been probing whether speculators are manipulating the price of oil and gasoline and announced a series of measures to make the opaque world of oil trading more transparent.

In a surprise announcement, the Commodity Futures Trading Commission (CFTC) confirmed that since last December it's been investigating the trading of contracts for future deliveries of oil, commonly called futures contracts.

"Although the commission ordinarily conducts enforcement investigations on a confidential basis, the commission is taking the extraordinary step of disclosing this investigation because of today's unprecedented market conditions," the statement said. "The specifics of the ongoing investigation remain confidential. All commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices."

Although disclosing the investigation helps give the impression that Washington is acting to curb abuses that may be helping to drive up energy prices, it also could tip off those who are being investigated. Commission spokesman R. David Gary told McClatchy "given the prevailing market conditions and that they are of unprecedented nature," the disclosure was necessary.

"While these investigations are time- and resource-intensive, obviously a considerable amount of time has elapsed since the investigation" began, he said.

The acknowledgement of the probe seemed to suggest that there might be some truth to rumors of market manipulation. Normally, probes are kept quiet to avoid damaging reputations if no wrongdoing is uncovered.

If speculators are running up oil prices, the obvious next question is by how much?

Former Federal Reserve chairman Alan Greenspan has guessed that speculators may add at least $10 to the price of a barrel of oil. Other analysts have put the figure as high as $20.

A barrel of crude oil contains 42 gallons of oil, but a $1 rise in per-barrel costs doesn't translate an equal increase in the cost of gasoline. According to the American Petroleum Institute, crude oil costs about $1.09 more per gallon since Jan. 1, while gasoline has risen about 70 cents per gallon.

It's hard to say how much speculation has contributed to higher energy prices because growing global demand for energy and shrinking oil production have prompted fears of supply disruptions. Traders factor in a so-called risk premium into the price.

The unusual CFTC announcement followed several congressional hearings, the latest on May 20, where a prominent hedge fund manager testified that speculators in commodities markets are running up the price that ordinary Americans pay for gasoline and food.

"You have asked the question, 'Are institutional investors contributing to food and energy price inflation?' And my unequivocal answer is 'YES,' " Michael Masters, a portfolio manager for Masters Capital Management, said in prepared testimony.

Masters runs a hedge fund that invests pools of money on behalf of wealthy investors, and he told senators that the prices of most major commodities such as wheat, corn and oil have doubled and in some cases tripled over the past five years while supplies of them are adequate. The reason, he said, "is a demand shock coming from a new category of participant in the commodities futures markets: institutional investors."

Commodities markets have always attracted speculators who try to make fortunes by betting on the shifting prices of everything from pork bellies to oil. But today's commodities markets are flooded with money from deep-pocketed investors such as corporate and government pension funds, university endowments and foreign-owned investment vehicles called sovereign wealth funds.

These players, called index speculators, far outnumber the investors who plan to take delivery of a barrel of oil or a bushel of corn. Index speculators tend to distribute their money across an index of two dozen or so major commodities and essentially bet that prices will go up. In industry parlance, they "go long."

In the stock market, this strategy of buying and holding is normal. But trading in most commodities happens on a much smaller scale, so these indexed investments are overwhelming trading.

"You cannot throw this much 'long' money into a relatively small market without the ability to have a supply response and prices not go up," said Howard Simons, the president of Rosewood Trading, an economic research firm in Glenview, Ill. "It has to go up."


Read the CFTC statement.

Read Michael Masters' testimony.

McClatchy Newspapers 2008

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