Are big bets by speculators driving up oil? Experts disagree
— -- Speculation about whether speculators are to blame for the superspike in oil prices is in overdrive.
Now that it costs $100 to fill up big SUVs, an Agatha Christie-esque whodunnit featuring finger-pointing lawmakers and suspected speculators is gripping this oil-obsessed nation in search of someone to blame.
Anyone who drives a gas-powered vehicle or runs a business that uses oil — and is experiencing financial distress — can't help but wonder: What's causing prices to go up so much?
In the early 1970s, the Organization of Petroleum Exporting Countries was Public Enemy No. 1, thanks to its oil embargo, which caused gas shortages in the USA and long lines at the pumps.
But today's energy crisis is different. OPEC insists there's plenty of oil. There's no queuing up at gas stations. And Congress is pointing fingers at an altogether different villain: financial speculators.
"When I began to see wild swings in gas prices, I was suspicious of mischief in the markets," said Rep. Bart Stupak, D-Mich., who recently introduced an updated version of a bill dubbed the PUMP Act, or Prevent Unfair Manipulation of Prices Act.
The proposed legislation aims to close regulatory loopholes that enable speculators to manipulate and artificially inflate the price of energy.
Efficient market purists disagree. U.S. Treasury Secretary Henry Paulson, billionaire investor Warren Buffett and the oil-rich kingdom of Saudi Arabia all insist that free-market forces are at work. They cite the Economics 101 concept of supply and demand as the main reason a barrel of oil has surged above $140, up nearly 50% in 2008.
Phil Flynn, senior market analyst at Alaron Trading, sums up this thesis best: "You can argue that the economic fundamentals for oil are as strong as they have ever been in mankind's history." He cites robust demand from emerging economies around the world, a growing belief that future oil supplies will be tight, and the ability of foreigners to buy oil cheaply because of the steep drop in the value of the U.S. dollar.
Still, the search for a culprit is not surprising given how far and how fast oil prices have risen. Oil prices are now higher than the record set in the late '70s, adjusted for inflation. The oil rally is now bigger than the Nasdaq composite's run during the Internet stock bubble, Bespoke Investment Group says. And the energy sector is now the second biggest by market value in the Standard & Poor's 500 index, at 15.6%, three times larger than it was at the Nasdaq top in March 2000, says S&P.
The financial fallout is hard to ignore. Oil's rise has caused a sharp drop in stock prices, made it harder for average Americans to make ends meet, forced U.S. automakers to rethink their emphasis on gas-guzzling SUVs, and put domestic airlines on a death watch.
That's why Congress is on the offensive. Lawmakers are holding what seems like daily hearings to figure out what's going on in the futures markets where the price of oil is set. They have introduced a flurry of legislation designed to curb speculation. They are also working to boost the manpower and financial resources of the Commodity Futures Trading Commission, the USA's top commodities cop, to help it better monitor and detect questionable trading practices. The CFTC has 447 full-time employees, 50 fewer than at its inception in 1976.
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