Consumers strapped by high fuel prices got some good news in April: Demand was down, driving oil stockpiles higher. Overnight gas prices, however, shot up by 14 cents a gallon. The contradiction was repeated in early June — another decline in consumption, another jump at the pump. By mid-June crude oil prices had reached almost $140 per barrel on the New York Mercantile Exchange, as the national average for a gallon of gas topped $4.00, a $1.50 increase in two months. What gives?
China’s unslakable thirst for energy and the falling dollar are among the usual suspects. But many critics blame rising prices in part on speculation by hedge funds. The U.S. Commodity Futures Trading Commission shows record purchases of crude-oil contracts by hedge funds and other speculators (including a 50 percent increase in net long positions since the start of the year).
At a Senate hearing in late May on price increases, David Kelly, chief market strategist for JPMorgan Funds, said, “I think it is very important to realize that the growth in world oil consumption is not that strong.” John Hofmeister, president of Shell Oil Co., went so far as to suggest that oil would be more fairly priced at somewhere between $35 and $90 a barrel.
Big public pension funds and endowments, which have helped fuel the growth of the hedge fund industry, may also be contributing to the pain at the pump. Using the so-called swaps loophole, pension funds enter into agreements with investment banks that allow them to circumvent limits on the number of futures contracts purchased. Some fault the CFTC, responsible for regulating the commodities markets, for allowing such activity. In an effort to shore up its credibility, the CFTC responded in late May with a series of initiatives aimed at boosting transparency within the energy futures markets.
U.S. Treasury Secretary Henry Paulson Jr. rejects the notion that speculators are to blame, saying that oil prices are “about supply and demand.” But in a May research note, Lehman Brothers economists argued that “non-supply-
demand factors” contributed to the price increases.
Blaming traders for higher energy prices is misguided, says John Damgard, president of the Futures Industry Association: “Anyone who knows how futures markets work will realize that prices at Nymex reflect in a very accurate way the balance between supply and demand.” Proposals that include greater reporting requirements, new layers of oversight and even limits on speculation could cause lasting damage to the efficiency and appeal of the futures markets, he adds.
