Oil Speculator: 'Capitalist Pig and Proud'

Aug. 20, 2009— -- John Wesley McPherson, Jr. is an oil speculator.

While most Americans were suffering last summer from an economic double whammy -- $4-a-gallon gas and a plunging stock market -- McPherson was profiting. And in the fall when oil prices plunged, McPherson cashed in again.

Betting on oil is a very risky business. But get it right, like McPherson did, and there's a gusher of money to be made.

In 2008, McPherson and the other principals of Sequoia Financial Advisory Services turned a 32.4 percent profit, according to International Traders Research. In the same year, the Dow Jones industrial average lost 33.8 percent.

"I am a capitalist pig and I am proud of it. I have no business being in the market if I'm not trying to make a profit and no one else does either," McPherson said.

Now some in Washington are looking to rein in the ways of these speculators, saying that Americans will have lower prices at the pump.

But these big sellers and buyers of oil on the futures markets -- often unseen by the public -- say that is one of the worst things the government could do and would actually lead to more price instability.

"Speculators are present in the markets to take risks that other people don't want to take in exchange for hopes of making a profit. There were speculators that lost money in the run up of oil prices," McPherson said. "If crude oil speculators are bad, then stock speculators are bad. Then anyone who owns stocks with a profit motive is a speculator."

Not everybody sees it that way. Members of Congress and the trade group representing the major U.S. airlines have blamed speculators for run-ups in the price of crude.

Calling all Speculators

The term speculator itself is a bit of a loaded phrase.

Less than 1 percent of all futures trading on the New York Mercantile Exchange results in someone actually receiving barrels of oil. Everybody else is buying or selling the oil not for use but as an investment. They are speculating that the price will either go up or down and are making a financial bet based on their belief.

Those in the oil trading business say their bet-making is just like ordinary investors buying stocks or insurance companies betting that you will never need to cash in on your car's collision policy.

You might be an oil speculator and not even know it. Pension funds, mutual funds and hedge funds are all players in energy commodities. One of those investors is the California Public Employees' Retirement System, providing retirement and health benefits to 1.6 million people.

David A. Castelveter, spokesman for the Air Transport Association, the main trade group for the U.S. airlines, said speculators have been causing such volatility in the market that it is hard for airlines or other oil users to make appropriate business decisions.

Every $1 increase in the price of oil adds about $430 million to airlines' annual operating costs, Castelveter said. The group has been lobbying Congress and is backing a campaign Stop Oil Speculation Now.

"They are trading without ever taking a drop of oil," he said. "Speculators are trading paper."

Airlines also buy oil contracts they never plan to use, but those are typically done as a hedge against rising prices of the jet fuel they do consume.

Castelveter said the airlines are not trying to end all speculation. The group just wants to limit large trades which it believes is "artificially driving the price."

"We want more transparency in the market so there isn't market manipulation," Castelveter said.

Is Greed Good?

The Commodity Futures Trading Commission has been holding hearings in Washington on oil trading. The government agency is considering whether it should limit how many futures contracts hedge funds, investment banks and other speculators can control. New regulations could be in place by late October or November.

Oil analyst Andrew M. Lipow said such speculative buying happens all the time in the stock market but is being noticed in oil futures because consumers are using the product.

With stocks, he said, "as long as the prices go up, the public is happy."

But oil is different.

"The amount of controversy rises as the public is paying more. When the consumer is getting cheap energy, there are very few complaints occurring. But we do see the affects of speculators in both types of markets. Speculators can make more or lose a lot of money as well."

"There's no doubt that in 2008, speculators did play a part in the rising oil market. But I think sometimes people forget that there were other fundamental factors that happen in 2008 as well," he added.

Lipow said that speculators do serve a purpose, adding liquidity to the market at times when others aren't willing to invest.

"We've gone from a market that had little regulation or little oversight to now the other end of the pendulum," he said. "People are looking for the one person or entity who is at fault. It's like the blame-assignment task force is out there looking for one thing."

Phil Flynn, senior market analyst and an oil trader at PFG Best, said that while he has no problems with more transparency regulators "could be overshooting."

Flynn said oil hit $147 a barrel last summer because of global demand and that "people were afraid that the U.S. banking system was going to fail." They bought oil contracts as a hedge against the falling value of the dollar. Oil is traded in dollars.

We're speculators. We bet on prices going up and down," Flynn said.

If the government limits trading, Flynn said, speculators will buy oil contracts on the unregulated market.

How Money and Oil Mix

"If can't buy it in U.S., they will buy it in China or buy it in Dubai," he said.

If the situation gets really bad, Flynn said, somebody might actually buy oil tankers and try to hoard the oil.

"That has the potential to do more damage to the economy," he said.

Flynn said the risk around oil production never goes away. Without speculators, he said, that risk would be put on the American consumer. That could lead to gas shortages like in the 1970s.

"I think the people that have criticized speculators," he said, "have just had a very narrow-minded view of what the fundamentals are and they want to look at the entire picture of what has driven the price of oil."