|
BUSINESS
Speculators responsible for oil price hike
By
Devajit Mahanta
There have been a lot of explanations offered for the record high of crude
oil prices over the last few months, a weak dollar, strong demand overseas,
greedy oil companies and a stubborn OPEC. The latest culprit singled out
and the campaign trail is oil speculators. On July 23, 2008 the United
States Senate voted unanimously to move forward with debate on legislation
to curb speculation in energy markets as lawmakers seek to respond to
record oil prices. Republican presidential candidate John McCain last week
in Houston
said “When you have enough speculators betting on the rising price of oil,
that itself can cause oil prices to keep on rising.” As long as the US interest
rates will remain low, commodity markets in general, and crude oil in
particular, will remain exposed to large speculative swings. Crude oil
futures reached a closing high of $145.29 a barrel July 3, 2008 in the New
York Mercantile Exchange.
Record-high oil prices are hurting Indian families and damaging our
nation’s economy. In response to this growing crisis M. S. Srinivasan,
India’s petroleum secretary, has an unorthodox recommendation for cooling
overheated prices, halt trading of crude oil on commodity exchanges.
Trading on exchanges likes the New York Mercantile Exchange (NYMEX), is
contributing “enormously” to high prices. If crude was eliminated from the
commodities traded on Nymex, Srinivasan predicted, the world would “see a
drastic reduction in the price.” But Richard Schaeffer, the chairman of
NYMEX dismisses Srinivasan’s suggestion of halting oil trading. He said,
“Nymex is just a central point where buyers and sellers can come to
exchange their wares, Nymex don’t make the prices only make the prices
known.”
In recent years, however, crude oil futures trading has seen new money from
institutional investors — such as hedge funds, pension funds and index
funds linked to crude oil. Investment from crude linked indices jumped from
$13 billion in 2003 to $260 billion today. These investors are not in
commodities or crude oil because their business not depend on it; they are
simply looking to make a profit from fluctuations in prices (that’s the
classic definition of speculation) and these new investors are responsible
for driving up prices.
The Commodity Futures Trading Commission (CFTC), the regulator responsible
for futures markets in the US,
found that there was no evidence that speculation was responsible for
current prices. Market fundamentals show us that production has not kept
pace with growing demand for oil, resulting in increasing prices and
increasingly volatile prices.
There is no evidence that we can find that speculators are driving futures
prices for oil. In 2006, 100% of those who purchased oil contracts lost
money because of the market’s contango (meaning spot oil prices were less
than the contracted price on the date of delivery). In the fall of that
year, when banks started demanding that margins be paid on those losing contracts,
oil collapsed back to nearly $50 a barrel. In only one and half year, we
should not have forgotten that lesson, too. Relatively speaking, a small
proportion of oil production is traded in the futures market. Global oil
sales at current price levels amount to about $4.3 trillion. The futures
market accounts for only $260 billion.
The bulk of oil is sold by way of refinery destination-specific supply
agreements. The fastest way to bring down oil prices in short-term, is by
reducing reckless and unfair speculation in the futures markets while, at
the same time, enacting measures for the mid and long- term to expand oil
supplies.
Readers can send their feedback at devajitmahanta@gmail.com
|
<>
No comments:
Post a Comment