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Speculating on why oil prices are soaring

June 25, 2008|DAVID LAZARUS

So I rode the bus to work again Tuesday, as I said I'd be doing at least once a week in response to sky-high gasoline prices. This time I was lucky to get a seat -- more people apparently are making the same decision I have.

When I got to the office, I saw a wire story out of Brussels, where OPEC President Chakib Khelil predicted that oil prices "will not come down." And, as is often the case when an OPEC bigwig says such things, oil prices promptly went up even more.

Thanks, dude.

Then I saw reports out of Washington, where energy analysts testified before Congress on Monday that the price of gas could fall to $2 a gallon if we could get meddlesome speculators out of the oil market.

That cheerful prospect was advanced by Michael Masters of Masters Capital Management, who predicted that by getting fund managers to pack up their toys and go home, oil would plunge to $65 to $75 a barrel, or about half its current price.

This sentiment was seconded by a handful of other prominent analysts, who said pump prices could return to Earth in just a matter of days if speculation in the futures market gave way to good old-fashioned supply-and-demand fundamentals.

Congressional leaders apparently think so too, or at the very least they see billionaire fund managers as convenient scapegoats for all our energy woes.

"Energy speculation has become a growth industry, and it is time for the government to intervene," said Rep. John D. Dingell (D-Mich.), who chairs the House Energy and Commerce Committee. "We need to consider a full range of options to counter this rapacious speculation."

Do we?

Although I don't feel particularly comfortable with the vast wealth some hedge funds accumulate by placing bets on the market, I accept that this is how the game is played. Simply put, investing means you're rolling the dice on prices going up or down.

"What does the phrase 'speculator' mean anyway?" asked Francis Longstaff, a professor at the UCLA Anderson School of Management who specializes in financial markets. "Anyone who invests is a speculator."

He said fund managers typically provided liquidity to markets by buying or selling amid uncertainty. "They take risks," Longstaff said.

He likened the actions of fund managers in the oil market to the way many people approached real estate investing.

"If you buy a house today, you're betting that the market is going to go up," Longstaff said. "If you sell, you're betting that it's going to go down.

"There's this stereotype of a speculator that gets trundled out every time prices do something we don't like," he added. "This is fiction."

Severin Borenstein, director of the UC Energy Institute, said Congress and some members of the media had spent considerable time theorizing about the role fund managers have played in driving up oil prices.

"The theories may have some initial appeal," he said, "but then they run headlong into some difficult realities."

The first such reality is that there's been no shortage of oil buyers even at current high prices -- a sign that supply and demand are playing their expected market roles.

"If all of the supply of oil

is really being consumed at

the current prices, then it

does not make sense to blame those prices on financial investors who are neither supplying physical oil nor consuming physical oil," Borenstein said.

He said it's possible that mysterious speculators could be creating shortages by buying up vast quantities of oil and squirreling it away for later. But if so, where? "That much oil would be very difficult to hide," Borenstein observed.

His conclusion? "The most likely reason for high oil prices is the simplest and, unfortunately, also the most intractable: too much demand chasing too little supply."


Yes, it's likely that fund managers influence energy markets with their big-bucks buying and selling. But are they to blame for runaway oil prices?

Susanne Garfield, a spokeswoman for the California Energy Commission, said investment money has been pouring into all commodity markets, including oil, primarily as a result of weakness in the dollar.

The question, she said, is whether prices are soaring because investors are increasingly turning to oil, or whether investors are increasingly turning to oil because prices are soaring.

"I don't know which is first, the chicken or the egg," Garfield said.

Philip Verleger, an economist and consultant who specializes in energy markets,

is among those who think that speculators have "nothing

to do" with the price run-up. He believes that oil prices

will come back down as additional supply hits the market, perhaps within a couple of years.

I'm not as confident that sufficient reserves exist to keep pace with the planet's oil thirst.

For that reason, I find myself in rare agreement with the Organization of the Petroleum Exporting Countries: Oil prices won't be heading south, at least not until demand eases. Maybe that's accomplished through alternative energy sources, maybe through increased fuel efficiency.

Until then, see you on the bus.


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