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Published:June 24th, 2008 14:23 EST
Is speculation driving the price of gasoline?

Is speculation driving the price of gasoline?

By SOP newswire

In the end, the dramatic rise in oil prices may be a matter of supply and demand after all-- supply and demand of oil futures contracts, that is.

Data provided to the House Energy and Commerce Committee by the Commodity Futures Trading Commission shows that speculators now control an overwhelming amount of the oil futures market.

In 2007, speculators owned just 37 percent of the contracts to buy West Texas Intermediate Crude on the New York Mercantile Exchange. The remaining 63 percent was controlled by oil refiners, wholesalers, trucking companies and other end users of petroleum products.

By April of this year, the proportion had almost reversed itself. Speculators controlled 71 percent of the contracts while oil users held only 29 percent.

With more and more money from speculators chasing a finite number of oil futures contracts, the supply and demand principle takes hold. When demand for something outpaces the supply, the price rises.

Take the speculative money out of the market, for example, and watch what happens. With another 71 percent of oil contracts up for grabs, and no speculative money to compete for it, oil users are the only ones left bidding for contracts. They don`t have to bid as much, now that there is less demand.

While the Bush Administration`s position is that speculation is only a small factor in oil prices, the campaign to get speculators out of the market is gaining critical mass. Congress is drafting various legislation to limit speculative investments in commodities markets and both major presidential candidates are proposing various limits on speculators.

Speculators have found the oil markets profitable investments because oil is bought and sold in dollars, whose value has seriously eroded over the last year. Speculators have pushed up gold prices for the same reason, but it`s unlikely any anti-speculative limits will be placed there.

After all, consumers don`t run their cars on gold. Though increasingly, many surely feel that`s what they`re doing every time they pull up to the gas pump.

Echoes of Katrina

Today`s situation reminds some observers of the gas price hikes that followed Hurricane Katrina. It was nearly two years that we reported that gasoline futures trading was doing more to keep gas prices high than damage to Gulf drilling rigs or Gulf Coast refineries. (Story).

In August 2006, the U.S. Commodity Futures Trading Commission (CFTC) launched an investigation into European oil company BP, to determine if it manipulated the crude oil and unleaded gasoline markets.

Last month, the CFTC made a similar announcement, saying it had undertaken a six-month investigation into possible price manipulation in the oil and gas markets.