The oil shock of 2008 helped drive the U.S. economy into the Great Recession. Oil at that time cost a record $147 per barrel, and gasoline prices surged to $4.11 per gallon in July 2008?the highest price ever. This squeezed families? budgets because it is very difficult for most people to significantly reduce driving in the short run when prices rise. And the U.S. Commodity Futures Trading Commission, or CFTC, found that the 2008 oil record was partly driven by speculators driving up prices to make a quick killing.
This year ?it?s like d?j? vu all over again.? Oil prices are rising to heights not seen since 2008. Oil rose from $85 per barrel to $112 per barrel in a little more than two months?a whopping one-third leap. Gasoline prices have followed along, rising by 70 cents per gallon?or 23 percent?during this same time. As our economy struggles to recover from the Great Recession, Americans are again forced to pinch pennies to afford their commute to work, school, and worship. Meanwhile, oil companies prepare to reap record profits in the first quarter of 2011.
As in 2008, there are serious indications that speculators are driving up oil prices. CFTC Commissioner Bart Chilton released data that found that:
Hedge funds and other speculators have increased their positions in energy markets by 64 percent since June 2008 to the highest level on record.
Similarly, a dozen U.S. senators wrote to CFTC Chairman Gary Gensler that ?speculators are seizing on recent political turmoil in North Africa and the Middle East to drive energy prices to unwarranted levels,? citing numbers from the CFTC?s weekly ?Commitment of Traders Reports? that indicate since January 25:
Money managers have increased their long positions in NYMEX West Texas Intermediate crude oil futures contracts by more than 35 percent, or the equivalent of 75 million barrels of oil.
According to Investopedia, a long position in a commodity futures contract is made when an investor ?enters a contract by agreeing to buy and receive delivery of the underlying [commodity] at a set price - it means that he or she is trying to profit from an anticipated future price increase.? By buying oil futures long, speculators are betting that they expect oil prices will increase over the life of the futures contract so the oil is more expensive at delivery time compared to the original purchase price. Political instability in an oil-producing nation or region often leads end users and speculators to increase their purchase of long oil positions due to the anticipation that future prices will be higher. The fear that prices will continue to rise leads oil end users to pay more now for future delivery of oil to lock in a lower price than the one they expect upon delivery.
Indeed, two weeks ago Goldman Sachs & Co. researchers caused a stir in the commodities trading world when it named ?excessive speculation? the culprit for inflating oil prices ?$20 higher than supply and demand dictate,? and advised its clients to sell off their oil-related assets because they were being overvalued due to speculation.
Oil market analysts note turmoil in the Persian Gulf as a factor for higher oil prices, beginning with a small price bump around the January democracy protests in Egypt. The uprisings soon spread around the region.
Prices then took another leap up when regional political unrest hit Libya, disrupting its production of 1.8 million barrels per day, or about 2.1 percent of the world?s daily production. A decline in Libya?s prized sweet crude (the best for refining into gasoline) certainly rattled Europe and its market for crude oil. But market fears about potentially declining global oil supplies should have been ameliorated when Saudi Arabia used its vast reserves to fill the supply gap. But as Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young, observes:
When Saudi Arabia increases production, as they just did, it is clear that oil supplies are plentiful and that the current pricing volatility is driven by market psychology and not necessarily real-time fundamentals.
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I'll believe corporations are persons when Texas executes one.: LBJ's Ghost
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