Oil Prices Under the Microscope

By Heide B. Malhotra
Epoch Times Staff

Fueled by a number of market experts and the media, it has been suggested that profit hungry investors trading in oil futures are the cause of oil price volatility, that is, the rise or fall of oil commodity prices.

“A growing army of commentators and pundits grimly hinted about ‘speculators’ who were manipulating the oil market and profiting from the misery of the American people,” said a mid-2011 article on the Daily Finance website.

The Organization for Economic Cooperation and Development (OECD) had also taken up the subject several years ago in its OECD Economic Outlook No. 76 stating, “The net impact of speculation on the oil price is likely to be small. … Concerns have surfaced repeatedly about the possibly destabilising role of speculative hedge funds. … Speculation may exacerbate price volatility.”

For example, when the real estate bubble burst and the stock market was on a downward dive a few years ago, investors abandoned investments in stocks and moved their funds into oil futures, affecting oil prices.

In August 2011, Sen. Bernie Sanders of Vermont noted in a press release on his website that after evaluating a list by the U.S. Commodity Futures Trading Commission (CFTC), he found that speculators maneuvered the 2008 crude oil futures market, resulting in that year’s jump in oil prices.

“This [CFTC] report clearly shows that in the summer of 2008 when gas prices spiked to more than $4 a gallon, Goldman Sachs, Morgan Stanley, and other speculators on Wall Street dominated the crude oil futures market causing tremendous damage to the entire economy,” Sanders stated.

In response to his findings, Sanders introduced the End Excessive Oil Speculation Now Act of 2011, under which the CFTC would be required to impose limits on excessive oil speculation. It was read twice and then referred to the Committee on Agriculture, Nutrition, and Forestry, and it has not been debated as of January 2012.

A related bill, introduced by Rep. Maurice Hinchey of New York, has made it a little further than Sanders’s bill. However, there is a caveat concerning the status of bills: “Introduced bills and resolutions first go to committees that deliberate, investigate, and revise them before they go to general debate. The majority of bills and resolutions never make it out of committee,” according to the GovTrack.us website.

Ample Discussions Concerning Oil Price Volatility

Although the speculation theory appears to weave through discussions concerning oil price volatility, some experts in this subject matter point to the economic theory of supply and demand as the main driver of oil prices,

“Supply and demand remain among the most influential components of oil-market behavior,” according to a 2011 article on the Council on Foreign Relations (CFR) website.

Demand as an influencing factor in the upward or downward spiral of oil prices appears to be a weaker argument, argues the CFR article. But it shouldn’t be disregarded completely, as lower demand puts downward pressure on oil prices and conversely, increased demand puts upward pressure on oil prices.

The CFR article does not discount speculative behavior by hedge funds, investment banks, and other Wall Street members, but suggests that the supply of oil has significant impact on oil prices.

“Geopolitical events that threaten oil supplies, such as troubles between Venezuela and the United States or Turkey and Kurdish Iraq, can spook investors and lead to price volatility,” according to the CFR article.

Also, it was suggested that the Organization of the Petroleum Exporting Countries (OPEC), as the major supplier of oil in the global market, uses its power to affect the oil prices by either calling for its members to increase or decrease production.