Oil Speculators: Manipulative Evil Masterminds or Just Savvy Investors?

As the price of oil climbed over the past few months, a growing army of commentators and pundits grimly hinted about "speculators" who were manipulating the oil market and profiting from the misery of the American people. In the darkest depictions, these speculators were alleged to be aligned in a vast, global cabal bent on squeezing money out of the U.S. middle class by driving up the price of crude.

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These rumblings about speculators are hardly surprising: They echo the groundswell that emerged three years ago, the last time that gas prices exploded. For that matter, there's no doubt that oil speculators exist: Oil futures are traded on the New York Mercantile Exchange (NYMEX), as well as on London's Intercontinental Exchange (ICE) and through direct sales. But do those speculators wield the diabolical, nearly omnipotent power over the market that some critics claim, or are they -- like the drivers who are now paying close to $4 a gallon for gasoline -- merely riding pre-existing trends?

Supply and Demand vs. Speculation

In all likelihood, the answer is a bit of both. The traditional explanation for gas prices is that they move based on supply and demand: Put simply, there is a limited supply of petroleum available on world markets at any given time, and as a rapidly growing number of people in emerging economies like China and India buy cars and become drivers, Americans must compete for fuel in an ever-more-crowded marketplace.

With more drivers clamoring for a share of that limited supply of gas, oil companies, refineries and gas stations can charge more, and the price goes up. But rising prices may lead drivers to cut back on their gas consumption, which increases the available supply and pushes the price back down.

According to speculation theorists, this supply-and-demand equation is being short-circuited by commodities traders, who push the price of gas up in order to reap a quick profit. These traders buy oil futures at low prices using mostly borrowed money, encourage the price to rise, then sell the futures at the new, higher price and collect the difference. Meanwhile, when oil producers see the market rising, they try to hold on to their crude so that they, too, can sell it at an inflated price -- which reduces supply further. Between the traders and the producers, oil prices shoot up, torturing drivers.

The Disappearance of Oversight

Up until a few years ago, oil speculation wasn't really a problem: Crude oil futures could only be bought and sold on the NYMEX, where they were regulated by the Commodity Futures and Trading Commission (CFTC), a government organization that was created in 1974 to -- you guessed it -- protect the market against speculators. For decades, the CFTC did its job well, watching over sales of oil futures and ensuring that investors didn't drive up prices to make a profit at the expense of consumers. But in 2000, everything changed.

That year, two events effectively crippled the CFTC. The first was the passage of a provision of the Commodity Futures Modernization Act -- sometimes called the Enron loophole -- that made it legal for companies to trade oil futures outside of the NYMEX in what are called over-the-counter (OTC) trades. The same year, the London-based Intercontinental Exchange made it possible for investors to buy and sell European oil futures, and offered a platform for OTC trading. In addition to driving up the global price of oil, futures trading on the ICE began to have a direct impact on U.S. gas prices in 2006, when the ICE gained the right to list U.S. oil futures. Since the CFTC could only regulate trades on the NYMEX, those events made it possible for speculators to escape oversight.

While it's difficult to prove whether or not speculators are directly responsible for high gas prices, most analysts agree that some portion of the current high cost of gas is attributable to the buying and selling of oil futures. After the sharp rise and steep fall oil prices took in 2007 and 2008, investigators found that 81% of gas contracts on the NYMEX had been held by speculators. In fact, 11% were held by a single company, Vitol. With that kind of pull, anti-speculation analysts argue, there's no question that oil traders can manipulate oil prices.

We Have Met the Enemy and He Is Us

But are gas speculators really the diabolical masterminds that some analysts have made them out to be? Fred Rozell, director of retail pricing for the Oil Price Information Service argues that these investors aren't malicious.

"Oil is a good bet for investors who are looking to reap a solid return on investment," he says. "This is especially true in the current economic climate, as a slowly improving economy points to increased consumption and tensions in the Middle East are fueling fears of a supply disruption." In fact, Rozell notes, many of these oil speculators are 401(k) plans that benefit middle-class consumers.

Beyond that, there's always a seasonal increase in the price of fuel. In the spring, gas companies switch over from their winter-grade fuel to their summer-grade. The summer mix contains different additives that, according to the EPA, cut down on pollution. To make the summer-grade fuel, refineries have to briefly shut down, a move that causes the price of gasoline to shoot up. Rozell calls this seasonal increase the "petronoia rally," as the brief gas shortage fuels paranoia among consumers and investors. He notes that gas prices usually peak in early May, then slowly decline.

What Can Be Done?

With high gas prices threatening America's fragile economic recovery, many people are asking what can be done to curb speculation. Last month, the Department of Justice launched the Financial Fraud Enforcement Task Force, which is tasked with fighting illegal oil speculation. While this might help somewhat, the sad fact is that most oil speculation occurs legally on the NYMEX, the ICE and in OTC trades. Ultimately, the solution is to increase the power of the CFTC.

Last year's Dodd-Frank Wall Street Reform and Consumer Protection Act was designed to do just that: Among other things, it gave the CFTC the power to regulate OTC trades. However, conservative opponents of the law have fought against its implementation: U.S. Reps. Darrell Issa (R-Calif.) and Michele Bachman (R-Minn.) introduced legislation to repeal the law, and Rep. Frank Lucas (R-Okla.) recently proposed H.R. 1573, which would delay its implementation until 2013.

If the Dodd-Frank Act's provisions go into effect, they could go a long way toward stabilizing gas prices, which would be a major boon for consumers. If not ... well, public transportation is looking more and more attractive.

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if you want to see any improvement in our economy - the price of a barrel of oil has to come down, and stay down so the price of gasoline will come down. So people can afford to drive to work and the market place to shop for goods. If the speculators keep raising the price of oil or keep up where it is now, you will never a better economy.

June 07 2011 at 5:33 PM Report abuse rate up rate down Reply

Major Fraud Alert

The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

Bank of America violated the 21st Century Act: Final Amendments to Regulation CC Section: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040726/attachment.pdf

seeking reimbursement of Credit, Loan, and Finance Balances as a "Bank Entity" and not a "Nonbank Consumer" as specified on Pages 85 and 86.

The person they sued through a LLC. Debt Collection Company and Law Firm was the "World Fortune Owner" who "Counterclaimed" and won.

Now all Contracts of any Corporations (Including Employment) under the "Controlling Interest" of any Investment Bank Worldwide are "Null and Void", and are also under the stipulated Rules and Regulations of an "Closely-held S Corporation rendering all Employed under Legal Actions against “Domination”, and also means that "No Corporation can hold Shares" officially making every Stock Exchange on the Planet a "Ponzi Scheme" by default.

Businesses owned by the States (Public Corporations) are being sold Stock Shares by Corporations also under the Federal Banking System in this Worldwide "Ponzi Scheme". The World Fortune Company Merrick Inc. Sweden is dissolving Millions and Billions of Dollars from "All Levels of Government"in the U.S. of Financing based upon Years of "negligent inaction" involving this case.

The Federal Government has already been forced to discontinue supplying the Financing States use to pay their debts, Persons in Government Offices may want to begin to take their jobs more seriously, these are different times from 10 Years ago and you will not be accepted civil servants here just because you say you are here to do the right thing.

May 28 2011 at 11:50 PM Report abuse rate up rate down Reply

Thank you for this nicely balanced article. Indeed, it's not really fair to blame speculators for working for their own interests when they're following all the rules. This is a simple case of when the Republicans create perfect conditions for a mess, there's probably going to be one. And so here we are.

May 20 2011 at 8:33 PM Report abuse rate up rate down Reply

I say send all the speculators to Syberia!!!!! What makes me the maddest is that we have so much oil right here and we just sit on it. While we pay outrageous gas prices! The Arab countries pay pennies for their gas and laugh at us!!!!!! Sometimes for a country so wealthy and smart we are the yet the dumbest! We let these speculators make millions for the weathly investors and Washington does nothing!! Curse them all !!!!!!!!!! Vote them all out!!!!! Put Goofy in the white house how much worse can he do???

May 19 2011 at 5:43 PM Report abuse rate up rate down Reply
Not Again

I just got a $829.99 iPad2 for $98.37 and my girlfriend snagged an awesome $1299 MacBook Air for only $137.93, its being delivered tomorrow. I would be a fool to keep paying high retail prices at places like Walmart or BestBuy, when I even sold a 37" HDTV to my boss for $600 that I only paid $78.24 for. I use two sites, both are good, SnagBids.com
and BidsGo.com

May 17 2011 at 10:04 AM Report abuse rate up rate down Reply

Who do you think those speculators work for?? Please. We haven't even touched our Alaskan reserves, much less our Gulf resources. "Newly" discovered Rocky Mountain supplies and all the natuiral gas we can use. Give it a break. We only need the Gov. to dictate what the Oil companies will charge per gallon, since there are so many Trillions of barrels on Federal Lands.

May 15 2011 at 9:29 PM Report abuse rate up rate down Reply

An alternativ­e recommenda­tion to replace The Federal Reserve is to go back to The Constituti­on of The United States where it is clearly stated that the Congress has the sole responsibi­lity to print and coin money and to determine the value of the money. The Treasury Dept. can easily handle the printing process.

This would forever eliminate the fraud of paying interest and incurring debt to a privately owned, for profit money printing monopoly, like The Federal Reserve. Declare the "National debt" as null and void due to the massive fraud and unconstitu­tionality of the Federal Reserve Act..

Abolish The Federal Reserve and it's evil servant, the IRS. This nation got along just fine with out an income tax or the IRS for nearly 130 years. That will free up about $750,000,0­00,000 to $1 trillion per year at current expenditur­es. Issue money on a formula that incorporat­es population and gross domestic product.

Avoid like the plague getting into gold or silver backed currency because the same oligarchic­al families and businesses who control our economy now through the Federal Reserve have control of the world's gold and silver markets.

Return manufactur­ing to this country by what ever means are required.

Prosecute those members of government who are found to have committed treason and/or violated their oaths of office. Investigat­e and prosecute those individual­s in and behind The Federal Reserve fraud who have defrauded the American citizens for 98 years

May 14 2011 at 1:08 PM Report abuse rate up rate down Reply
J Ries007

Here it is again..the Republicans protecting their backers..A check of their voting records will clearly show whom they represent!

May 14 2011 at 12:50 PM Report abuse rate up rate down Reply
Pradeep Chowdhar

In my opinion this article's author doesnot have insight on the subject. Oil mafia is encouraging speculation and charging bills for their ills (leak costs, extra insurance etc..) moreover amid increasing prices Saudis actually cut production last 2 months. Where's the supply-demand equation? Its fixed by the oil mafia. And they now have to pay settlements for keeping dictatorships in many gulf states.

May 13 2011 at 11:18 AM Report abuse rate up rate down Reply
1 reply to Pradeep Chowdhar's comment

People have wonderful suggestions. However, the bottom line is that any changes in the price of anything depends on the attitudes and goals of those in charge. If their attitude is profit at any cost, they will lie to the government and the consumer in an attempt to maintain their obsession for greater and greater profits. These corporate heads make huge incomes compared to the customer. We should all start using bicycles and candles...no customers, no profits, no big time salaries. As for manufacturing coming back to America, we will never see that again. When money crossed the palms of the signer of NAFTA, that was the beginning of the end. Our whole work force has to change direction, if we want our economy to improve substantially...That includes how we educate our children about "work."

May 13 2011 at 12:15 PM Report abuse rate up rate down Reply
1 reply to gerrywong's comment

Except industrial production is already setting new all-time highs on a monthly basis.

May 14 2011 at 9:45 AM Report abuse rate up rate down

We have a big problem that requires some simple solutions(not easy but simple)
1: Stop ethanol production, it is not cost effective. It also keeps food prices artificially high.
2: Start changing trucks to Natural gas engines. We have huge supplies.
3: Drill for oil, we had our biggest growth period when we had huge jobs in energy production.
4: Reducing our trade imbalance in energy will strengthen the dollar.
5: Manufacturing will make a comeback here in the U.S.A. If we have domestic energy sources.

May 12 2011 at 5:09 PM Report abuse rate up rate down Reply