Oil speculators under fire

By The Wall Street Journal

Policymakers on both sides of the Atlantic launched an effort to crack down on what they called speculation in oil markets, underscoring concerns that a sharp rise in oil prices could worsen the global economic downturn.

In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.

In an opinion piece submitted to The Wall Street Journal, meanwhile, British Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."

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The moves come at a time when the hotly debated idea that speculative investors are driving up prices is gaining credence, and political momentum is building to stop them.

In recent months, oil producers and Asia's biggest oil-consuming nations have called for regulators to address the issue of price volatility, and the U.S. Senate has blamed speculators for high commodity prices.

On Tuesday, Democratic Sen. Byron Dorgan, a backer of a bill introduced last year to limit speculation, called the CFTC's action "a positive first step" to curbing "oil speculators looking for a quick buck at the expense of American consumers."

The price of oil recently bounced back to some $73 a barrel from a 2009 low of nearly $34, despite a slump in demand, bulging supplies and a world economy in the doldrums. Crude, which closed at $62.93 Tuesday, reached $145 a barrel last summer. Higher prices could affect the prospects for economic recovery: A sustained 10% rise in the price of oil can knock as much as 0.4 percentage point off global economic growth over the subsequent 12 months, estimates Jim O'Neill, chief economist at Goldman Sachs.

Much trade in oil futures is carried out by commercial traders such as oil companies, utilities and airlines seeking to protect their profits against swings in energy prices. In recent years, big noncommercial traders such as hedge funds and investment banks have poured money into oil and other commodities. Such investors typically put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities.

As of last July, financial investors had about $300 billion riding on such indexes, roughly four times the level in January 2006, according to the International Energy Agency, a watchdog headquartered in Paris. Money drained from oil and other commodity markets during the second half of 2008, but investments have since surged, partly as a hedge against inflation and a weaker dollar: JPMorgan Chase analysts estimate that a net $25 billion was poured into commodities in the first half of 2009.

Oil-market analysts question the idea that speculative investments have pushed up prices. They attribute the current volatility to uncertain prospects for economic recovery -- and the long-term rise to a surge in demand from China, India and other developing economies.

"No one has a clear expectation of what the future price is going to be," said David Kirsch, an oil-market analyst at PFC Energy. "Putting limits on financial investment is only going to have a limited effect on overall volatility."

Continued: The interventionist line

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