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Oil prices hike: Is speculation all to blame?

(Xinhua)
Updated: 2008-06-29 08:42

NEW YORK - Oil prices broke the US$140 level for the first time this week, with August crude surging near US$143 a barrel on both New York Mercantile Exchange (NYMEX) and ICE Futures Exchange in London.

While oil has gained more than 40 percent this year, more and more people now shift their focus onto the role of speculators in the price hike. But is it all because of speculation?

Many believe so. A report the US Congress released Monday showed that, in January 2000, 37 percent of the NYMEX crude futures contracts were held by speculative traders; but in April 2008, the number has soared to 71 percent. Meanwhile, the proportion of contracts held by commercial traders greatly declined.

Related readings:  Oil prices hit new record at $140  Asian stocks sink on fears over oil, US  For all its pains, energy price hike a wise move  Is the oil bubble ready to burst?

The US Commodity Futures Trading Committee (CFTC) revealed in May that it began investigating potential price manipulations in the oil trading market in December 2007. The early findings show that since the sub-prime mortgage crisis large amount of speculation fund has turned to buy commodities like crude as a hedge against inflation.

Speculation theory was also echoed by the Wall Street. Hedge fund manager Michael Master testified on May 20 that his pals in the Wall Street are pushing up world oil prices through speculative investment in futures market. Moreover, he pointed out at the hearing held by CFTC acting Chairman Walter Lukken on Monday that with greater regulation oil prices could drop to the level of 60 dollars a barrel within about 30 days.

Three days later, just after the oil prices surpassed US$140 point, the US Congress approved a bill with a 402:19 vote that directs the CFTC to use its authority to curb speculation in the energy futures market.

However, some argue that "calling it speculation is way too simplistic"; or instead, speculation is more the consequence than the cause of a tight market.

When testifying before a US Congress panel on June 3, billionaire Soros admitted that there are "strong fundamental factors" while labeling the oil prices hike as a bubble largely made by investment institutions through index fund.

Daniel Yergin, who won the Pulitzer prize in 1992 with a book on the history of oil business, said in his testimony on Wednesday 's Congress hearing, "Financial markets are today playing an increasingly important role in price formation -- responding to, accentuating, and exaggerating supply and demand, geopolitics, and other trends." He believed that the market is relentlessly bidding up oil prices in response to deep-seated fears that the growth in demand will keep outpacing the growth in oil supplies in coming years. "There is a shortage psychology in the financial markets and that is reflected in the price of oil," he said in an interview.

On the same day, Guy F. Caruso, Administrator of the US Energy Department Energy Information Administration (EIA), told a briefing that the imbalance between supply and demand is what has caused the oil prices to rise.

Based on EIA report, the global demand for energy in 2030 will increase by 50 percent compared with the level in 2005. Demand from non-OECD countries has especially soared since 2005, while OPEC output has not matched up. Caruso's view coincided U.S. Energy Secretary Samuel Bodman, who reiterated on the meeting between oil production countries and consumption countries held in Jeddah, Saudi Arabia, on June 22 that oil supply shortages instead of speculators are driving up prices.

Based on most estimates, the global safety cushion -- the amount of readily available oil that could be pumped in a moment of crisis-- is now less than two million barrels a day, a big slump from five million barrels a day in 2002. And nearly all of the safety cushion is in one country, Saudi Arabia, which makes the world even more vulnerable to political or other shocks.

Militant attacks and strikes have forced Africa's largest oil exporter Nigeria to produce one million barrels below its capacity. Potential of output increase is restrained in non-OPEC countries like Mexico and Russia due to lack of investment and outdated equipment.  

The Paris-based International Energy Agency, funded by consuming nations, in April again cut its 2008 non-OPEC supply outlook for the year, this time by 85,000 barrels a day to 50.5 million barrels a day.

Before Wednesday's Congress hearing on oil, 40th of its kind this year, the New York Senator Charles Schumer, chairman of the U. S. Congress Joint Economic Committee, told the press, "everyone would like to believe that there is a silver bullet - like a bubble or speculation - that can solve our oil problem." But, there is no easy answer to high oil prices, he said.