- speculative futures trading the main culprit.
Posted by Charles
According to Robert Weissman in his article, 'Manipulation, Speculation and Profiteering, What's Driving Skyrocketing Oil Prices?', market manipulation may be part of the reason why there is a recent hike in oil prices. The other important factor, he attributes, to supply, unable to keep up with demand (Weissman 2008a) . In an earlier analysis, he alleges that the oil companies are earning increasing profits even when the price of oil has increased. He argues, 'While the price of oil is going up, these companies' drilling expenses are not. Oil can trade at $40 a barrel, $90 a barrel, or $130 a barrel. It still costs ExxonMobil and the rest of Big Oil only about $20 to get a barrel of oil out of the ground.' (Weissman 2008b).
To add unease to the situation, the U.S. refining market is becoming more concentrated with mergers. According to Public Citizen, five oil refineries control more than half of the U.S. market with the top 10 controlling over 80 percent (Weissman 2008b).
If history has taught us anything, it is that oligarchies can further squeeze out competition and further drive prices up. Certainly, not a good sign of things to come.
Ralph Nader, an American Presidential Candidate, on the other hand, pulls no punches and attributes the increase to speculation. As he succinctly puts it, 'An essential product—petroleum—is set by speculators operating on rumor, greed, and fear of wild predictions' (Nader 2008).He quotes from various sources including, Iran's oil governer, Hossein Kazempour Ardebili who said that there are not enough buyers because there are 'more than enough oil' in the market' ; and Mike Wittner, head of oil research at Societe Generale in London who also holds the same view that 'the markets are well supplied with crude' (Nader 2008).
It is perhaps Engdahl who argues quite convincingly that at least 60% of increase in prices is due to speculation. His biting critique of the oil pricing system is equally scathing. As he asserts,
today's oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of "paper oil."… A June 2006 US Senate Permanent Subcommittee on Investigations report on "The Role of Market Speculation in rising oil and gas prices," noted, "…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices."
Similarly, the increase in food prices has also been largely a result of speculation in agricultural commodities according to some analysts.
McWhirter argues that it is a result of 'speculation in commodities futures following the collapse of the financial derivatives market'
(MacWhirter 2008, p. 25). Arguing that it is not a conspiracy but instead a way for banks to export debts to the developing world, these financial institutions moved from speculating in Internet stocks to the sub-prime mortages market to food commodities, which is the last remaining market left for speculation (MacWhirter 2008, p. 25).
The Oakland Institute cites a report from GRAIN which purports to validate this argument. Cargill, the world's biggest grain trader saw an 86% increase in profits from commodity trading in the first quarter of 2008 while Bunge posted a 77% increase in profits during the last quarter of 2007. ADM, the second largest grain trader in the world, registered a 67% per cent increase in profits in 2007 (Oakland Institute 2008).
That speculation is a major factor seems to be increasingly corroborated by opinion writers from major news organisation. William Pfaff argues,
On the Chicago CME Group market, which deals in some 25 agricultural commodities - it is a merger of the former Chicago Mercantile Exchange and Chicago Board of Trade - the volume of contracts has increased by 20 percent since the start of the year and now has reached the level of a million contracts a day. This will soon exceed the rate of growth reached in all of 2007.
The hedge funds are now active in commodities and are playing the futures contracts, where upwards of 30 million tons of soybeans for future delivery are contracted for every day. They are also buying the companies that stock…
… Speculative purchases have no other purpose than to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer. Even the general public can now play the speculative game; most banks offer investment funds specializing in metals, oil and, more recently, food products.
If there is a common link between the sudden increase in food and oil prices, it would be this - largely a result of commodities speculation. There is a need to question such speculations which will only cause the poor greater hardship, hunger and malnutrition.
Weissman, R 2008a, 'Manipulation, Speculation and Profiteering, What's Driving Skyrocketing Oil Prices?', Counterpunch, 2 June, accessed 2 June 2008.
Weissman, R 2008b, 'Time for a Windfall Profits Tax, What to Do About the Price of Oil', Counterpunch, 29 May, accessed 29 May 2008.
Nader, R. 2008, 'In Search of a Sane Government, What's Really Driving the High Price of Oil?', Counterpunch, 28 May, accessed 28 May 2008.
Engdahl, F. W. 2008, 'Perhaps 60% of today's oil price is pure speculation', Center for Research on Globalization, 2 May, accessed 29 May 2008.
Mcwhirter, I 2008, 'The trading frenzy that sent prices soaring', New Statesman, 21 April, pp. 25
The Oakland Institute, 2008, 'Dangerous Liaisons, A Battle Plan from the UN and the International Financial Institutions to Fight Global Hunger', accessed 16 May 2008.
Pfaff, W 2008, 'Speculators and Soaring Food Prices', International Herald Tribune, 16 April, accessed 5 June 2008.