Issue of the week: Are speculators driving oil’s rapid rise?

Oil prices are up a stunning 42 percent since December, and the federal government wants to know why, said Ian Talley in The Wall Street Journal. The Commodity Futures Trading Commission, the federal agency that regulates trading in oil, wheat, gold, and other commodities, announced last week that it was pursuing some 60 separate investigations of possible oil price manipulation. The CFTC doesn’t ordinarily comment on ongoing investigations, but agency officials may have felt pressured by several recent congressional hearings. Some witnesses at the hearings “contended that large investments in commodity futures by hedge funds and pension funds are distorting prices.” Oil industry insiders, though, insist that “possible shenanigans by market traders have little or nothing to do with the price of oil.” The meteoric rise of oil prices, they say, is the natural outgrowth of “rising demand, constrained supplies, and the weak dollar.”

Still, there’s no denying that oil markets are vulnerable, said Kevin G. Hall in the Portland Oregonian. “Today’s commodities markets are flooded with money from deep-pocketed investors such as corporate and government pension funds, university endowments, and foreign-owned investment vehicles called sovereign wealth funds.” Oil trading markets are relatively

small, and when new buyers arrive on the scene en masse, the influx of new money inevitably drives prices higher.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

There’s nothing necessarily sinister about that, said David Nicklaus in the St. Louis Post-Dispatch. “Americans love a good conspiracy theory, and the best ones these days involve energy.” But these new buyers “are not engaging in a conspiracy. They’re merely responding to market signals.” Pension funds and endowments are required by law to seek out the highest possible returns for beneficiaries, and right now, some of the highest returns can be found in the markets for oil and other commodities. But if you want to pinpoint a villain, try the Federal Reserve, which has cut interest rates so deeply that the interest payments on many bonds—historically, the preferred investment vehicle of pension funds and endowments—no longer keep pace with inflation. When that happens, it’s “a good time to own things like oil, grains, and metals,” whose prices tend to rise during inflationary periods. The fund managers are just doing their jobs.

But that’s not to say there aren’t some bad guys here, said Ed Wallace in the Fort Worth Star-Telegram. Most of the blame for high prices rests with the oil companies and refiners. They contend that supplies are tight, but all the available data says otherwise. Since April, the U.S. has added 11.9 million barrels to its oil reserves, “giving us 32.3 million more barrels of oil than we had on hand Jan. 1.” What’s more, according to Oil Movements, an organization that tracks every oil tanker at sea, oil companies have even more reserve supplies “hidden offshore, not declared in inventories.” U.S. oil refiners, which turn oil into gasoline, are also artificially limiting supply. In a little-noticed announcement in early May, refiners said they were cutting back their production. The upshot: lower gasoline inventories and higher profits for the refiners. Sometimes, it seems, conspiracy theorists uncover real conspiracies.