Oil 'Speculation' Foes Bridge the Atlantic Policy makers on both sides of the Atlantic launched an effort to crack down on what they called "speculation" in oil markets, underscoring growing concerns that a sharp rise in oil prices could worsen the global economic downturn.
In an opinion piece submitted to The Wall Street Journal, U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."
Hours earlier in Washington, the Commodity Futures Trading Commission, the main futures-market regulator in the U.S., announced it would hold hearings on whether to introduce tougher regulation of oil-futures markets. The rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a given time.
The moves come at a time when the controversial idea that speculators are driving up prices is gaining credence -- and momentum is building to stop them. In recent months, oil producers and Asia's biggest oil-consuming nations have called for regulators to address the issue of price volatility, and the U.S. Senate has blamed speculators for high commodity prices.
On Tuesday, Sen. Byron Dorgan (D., N.D.), a leading backer of an antispeculation bill last year, called the CFTC's action "a positive first step" to curbing "oil speculators looking for a quick buck at the expense of American consumers."
Since the start of the year, the price of oil has climbed to around $63 a barrel despite a big slump in demand and bulging supplies. Last summer, it reached a high of $145 a barrel. The resurgence can have a big effect on the prospects for economic recovery: A sustained 10% rise in the oil price can knock as much as 0.4 percentage point off global economic growth over the subsequent 12 months, estimates Jim O'Neill, chief economist at Goldman Sachs.
Much trade in oil is carried out by commercial traders such as oil companies, utilities and airlines, seeking to protect their profits against swings in energy prices. In the past few years, big noncommercial traders such as hedge funds and investment banks have poured money into oil and other commodities. Such investors typically put their money in indexes that track the value of futures contracts -- in which investors promise to pay a certain amount in the future for oil and other commodities.
As of last July, financial investors had about $300 billion riding on such indexes, roughly four times the level in January 2006, according to the International Energy Agency, a Paris-based watchdog. Money drained from oil and other commodity markets during the second half of 2008, but investments have since surged, partly as a hedge against inflation and a weaker dollar: J.P. Morgan Chase analysts estimate that a net $25 billion has poured into commodities in the first half of 2009, surpassing all previous annual inflows.
Oil-market analysts question the idea that speculative investments have pushed up prices. They attribute the current volatility to uncertain prospects for economic recovery, and the long-term rise to an oil industry that has struggled to boost supply in response to the surge in demand from China, India and other developing economies.
"The spread of daily oil-price movements around the monthly average is because no one has a clear expectation of what the future price is going to be," said David Kirsch, an oil-market analyst at PFC Energy. "Putting limits on financial investment is only going to have a limited effect on overall volatility."
In Congress, though, there is growing consensus that investors could be distorting prices. A recent report from the Senate Permanent Subcommittee on Investigations blamed speculators for driving up wheat prices in recent years, and recommended the CFTC enforce position limits on index traders in the wheat market.
In a statement, CFTC Chairman Gary Gensler said the agency will hold a public hearing to gather views from consumers, businesses and market participants on proposals to impose limits on trading in energy future contracts. The CFTC's proposed rules would also require hedge funds and swap dealers to report holdings -- including those traded over-the-counter and at overseas exchanges -- in a separate and routine way.
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