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Speculators targeted in blame game

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Speculators targeted in blame game

By Ed Crooks, Energy Editor

Published: July 4 2008 03:00 | Last updated: July 4 2008 03:00

“What do you mean, nobody’s fault? It has to be somebody’s fault!” Politicians’ reactions to oil prices over $145 a barrel and diesel over £1.32 a litre are reminscent of the ferocious Lucy in the Peanuts cartoon strip.

As the cost of oil has soared, everyone has been looking for someone else to blame. The MPs on the Treasury select committee yesterday fixed on the mysterious and allegedly powerful role of “speculation”, echoing Harold Wilson’s famous evocation of the “gnomes of Zurich”.

Launching an investigation may make MPs feel as though they are making a useful contribution to one of the biggest problems facing Britain and the world economy. But economists and experts who have studied the question have generally concluded that there is no clear connection between investment flows into the oil market and rising prices.

The superficial appeal of blaming speculators is obvious. As Lord Desai, the economics professor and Labour peer, wrote in the Financial Times last month , financial investors have $260bn in commodity markets, compared with just $13bn five years ago, and much of that money has gone into oil.

He argued that the “paper market” for oil futures, where daily turnover is many times daily physical oil production, was helping to drive up the prices because it was driven by expectations of price rises in the future.

In principle, however, speculation in oil futures can affect the price of real barrels of crude only if it creates an expectation that prices will be higher in the future than they are now, encouraging people to store oil so they can sell it at a higher price later on.

That is not really the case today. Although the price of oil to be delivered in nine months’ time is a little higher than the price of oil for next month, the price of oil for five years from now is cheaper. Nor is there any big build-up in stockpiles of oil to suggest that crude is being kept off the market.

There seems to be little or no correlation between the amount of financial investment in a commodity and the commodity’s price.

BP pointed out that financial investors had been betting heavily on a fall in the US gas price over the past year, and yet the price of gas had risen sharply. Commodities where there is effectively no financial investment at all, such as rice, have also gone up sharply in price.

BlackRock, the investment manager, this week presented figures showing that the volume of futures contracts in US oil had risen by nearly 300 per cent since 1995, over which time the oil price has risen by 700 per cent. The volume of futures contracts in lean hogs, meanwhile, rose by more than 600 per cent, but prices are up less than 50 per cent.

The reality of the oil market, and reason why prices have soared, is that demand is still growing, especially in oil-producing countries and China, and supply faces serious challenges. There is not a lot that any MPs’ inquiry can do about that.

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