Are Oil Traders Driving Up Prices? Two Senate panels have explored whether oil traders are driving up the price of oil. Conclusion? There's a lot of speculation about speculation.
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Are Oil Traders Driving Up Prices?

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Are Oil Traders Driving Up Prices?

Are Oil Traders Driving Up Prices?

Are Oil Traders Driving Up Prices?

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

Two Senate panels have explored whether oil traders are driving up the price of oil. Conclusion? There's a lot of speculation about speculation.


From the studios of NPR West, this is Day to Day. I'm Madeleine Brand.


And I'm Alex Cohen. Today, President Bush is asking Congress to lift the longtime ban on offshore oil drilling.

BRAND: Gas prices are four dollars a gallon. They're careening toward five dollars. Here's the president speaking this morning.

President GEORGE W. BUSH: High oil prices are at the root of high gasoline prices. Behind those prices is the basic law of supply and demand. In recent years, the world's demand for oil has grown dramatically. Meanwhile, the supply of oil has grown much more slowly.

BRAND: But what if it's something else, something besides supply and demand that's causing oil prices to rise? What if it's speculation by commodities traders? Senator John McCain raised that possibility in a speech yesterday in Houston.

Senator JOHN MCCAIN (Arizona, Republican): We all know that some people on Wall Street are not above gaming the system. When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising.

COHEN: Several of McCain's fellow senators expressed similar sentiments yesterday at a hearing on Capitol Hill, where the subject was regulating the oil speculators. The relationship between speculators and oil prices is a tricky one, one that we're tackling today on this program, and we begin with NPR's David Welna, who was at yesterday's hearings. He brings us this report from Washington.

DAVID WELNA: Illinois Democratic Senator Dick Durbin gaveled in the hearing on speculation, admitting the hearing itself might entail a fair amount of speculation.

Senator DICK DURBIN (Democrat, Illinois): No one knows for sure what's going on here. That's why we're conducting this hearing.

WELNA: The Agriculture Committee teamed up with an appropriations subcommittee for the hearing. Both panels oversee the Commodity Futures Trading Commission, which was set up 33 years ago to regulate the buying and selling of commodities such as oil on dates in the future. Walter Lukken, who's the commission's acting chairman, was there and got some stern lecturing from Durbin.

Senator DURBIN: There's been a lot of speculation about speculation and what impact it has on the price of oil. The honest answer is today, Chairman Lukken, you don't have enough information.

WELNA: Lukken readily admitted the CFTC simply doesn't know what's going on with a lot of futures trading. While its staff is at a historic low, he said, such tradings increased a whopping 8,000 percent. Lukken also allowed there could be some price fixing going on that's not yet been discovered.

Mr. WALTER LUKKEN (Acting Chairman, Commodity Futures Trading Commission): During these turbulent market conditions for crude oil, the environment is ripe for those wanting to illegally manipulate the markets. And as a result, the commission has stepped up its already aggressive enforcement efforts.

WELNA: And for that, he asked Congress to give the CFTC another 27 million dollars next year to hire 100 more regulators. This did not seem to please Georgia Republican Saxby Chambliss, who insisted the solution is not more regulation.

Senator SAXBY CHAMBLISS (Republican, Georgia): Particularly when the main problem is supply and demand. In this case, the data that I have seen so far does not show that blaming speculators will yield the result that we're all looking for, and that is lower gas prices.

WELNA: The Kansas Republican Sam Brownback applauded beefing the CFTC.

Senator SAM BROWNBACK (Republican, Kansas): Because it sure looks like to me there's a lot of speculation in these prices, and I get that from just what it looks like around but also from a number of knowledgeable people coming in and saying well, the fundamentals don't support these prices.

WELNA: One of those knowledgeable people is Exxon Mobil Vice President Stephen Simon, who said this to another Congressional panel in April, when oil was already selling above 100 dollars-a-barrel.

Mr. STEPHEN SIMON (Senior Vice President, Exxon Mobil): When you look at the fundamentals of our business, Congressmen, the supply-demand fundamentals, our assessment would be that price should be somewhere around 50, 55 dollars a barrel.

WELNA: The Exxon Mobil executive put the blame for the much higher oil prices on speculators. But CFTC Acting Chair Lukken would not go there.

Mr. LUKKEN: We're trying to see if speculators are driving the prices. We have not seen evidence from our data. It's difficult to prove a negative. And we certainly encourage those that are saying this, if, you know, where the prices should be and that speculators are doing this, to provide the data so that we can look at it and make an informed decision. But currently, now, we have not found a smoking gun.

WELNA: Lukken told the senators he's requesting more data from oil futures traders and will have a full report for Congress on his findings by mid-September. David Welna, NPR News, the Capitol.

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Is Another Bubble Behind Soaring Gas, Food Prices?

First, there was the dot-com bubble, when wads of investor cash made millionaires out of pimply teens seemingly overnight. When that burst, investors sought safety in housing, lulled by the false conventional wisdom that "real estate never goes down." We all know how that turned out. Now, as Americans feel their pocketbooks pinched by skyrocketing fuel and food costs, lawmakers on Capitol Hill have been holding a raft of hearings into whether speculative frenzy is once again to blame.

Here, a look at whether a "commodity bubble" is in the works.

Why do lawmakers think speculators are driving up food and energy prices?

It all has to do with what's been going on in commodities futures markets. Traditionally, these markets were used by players such as farmers, miners or refineries — who either produce the commodities being traded, or rely on them to do business. Activity on futures markets helps set the benchmark global price for food and energy.

In recent years, however, commodities markets have seen a flood of new money from institutional investors — such as hedge funds, pension funds and index funds linked to commodities. Investment from commodities-linked indices jumped from $13 billion in 2003 to $260 billion today, according to Michael Masters, the head of Master Capital Management LLC, a hedge fund. These investors aren't in commodities because their business depends on it; they're simply looking to make a profit from fluctuations in prices (that's the classic definition of speculation, and it's perfectly legal). But many lawmakers and other critics blame these new investors for driving up prices.

So how much of the jump in oil and food prices can be attributed to increased demand, and how much is due to speculation?

Investors have almost certainly helped push prices higher than they otherwise would be, but no one knows how much higher. In May, Masters testified before Congress that institutional investors are largely responsible for soaring food and fuel prices.

But other market experts aren't so sure. On Tuesday, for example, Merrill Lynch analysts issued a note arguing that speculative frenzy isn't to blame; supply and demand is, along with low interest rates that have made emerging markets more liquid and hungrier for raw materials. They point out that even commodities that aren't traded in funds — such as coal, rice and steel — have seen big appreciation.

Even lawmakers who blame speculators for soaring prices also acknowledge the reality of increased demand for food and energy from emerging markets such as India and China.

Is there evidence that market manipulation is at work?

None that has been documented. There's no disputing that the jump in food and oil prices has been astounding. Since January 2007, the price of crude has leaped from $60 to more than $130 a barrel. And prices for corn and other staples have reached record highs. But there's also no evidence that market manipulation is at play.

Nonetheless, those suspicious of the spike in energy prices are quick to point to so-called "dark markets" — energy trading markets that were deregulated in late 2000 at the request of Enron. Some people suspect nefarious transactions are taking place in these unpoliced markets, and that traders are raising prices basically at will. Again, there's no actual evidence that that is the case.

What kind of legislative solutions are lawmakers proposing?

Most proposals focus on energy speculation. On Tuesday, the Senate held a hearing looking at whether the Commodity Futures Trading Commission has the tools it needs to police the world's crude oil markets. In the last eight years, the commission's workforce has shrunk more than 20 percent, while the volume of trading it is supposed to keep an eye on has multiplied six-fold. Lawmakers are considering adding more staff and additional tools as a safeguard against possible market manipulation.

One proposal would limit the number of contracts that institutional investors — such as banks and pension funds — are allowed to hold. Another would require traders to put up more collateral in the energy futures market, to avoid what CFTC Acting Chairman Walter Lukken calls "excessive speculation."

Would this help lower prices?

Not likely. Even if investors are bidding up crude prices higher than supply and demand would dictate, unless market manipulation is occurring — and so far, there's no proof of that — increased oversight wouldn't help lower prices. And it could very well be that current oil prices do, in fact, accurately reflect current conditions: a world where economies and populations are growing very fast, and where refinery capacity is stretched.

What role does the weak dollar play in all of this?

The dollar's weakness is a big factor. The price of crude is set in dollars, so when that price fluctuates, Americans feel the pinch more acutely than, say, Europeans buying oil with the stronger euro. And as investors flee the dollar, they are lured to other more promising options, including oil.

Will it help if the Fed tightens monetary policy?

Yes and no. Fed Chairman Ben Bernanke has said that he's more concerned about rising inflation than economic growth — a signal that the Fed's interest-rate cutting spree may be at an end. Higher interest rates are a double-edged sword. On one hand, they would make the U.S. dollar more attractive to foreign investors and bolster the currency. And that, in turn, would make it cheaper for Americans to buy oil. But higher rates would also make it more expensive to do business, and for U.S. consumers to take out a mortgage or buy on credit.