Myth-makers caught short in oil speculation

BRUSSELS – As in military science there is the danger of “fighting the last war”, so in economic science there is the danger of puncturing the last bubble. This is especially hazardous when what one has is not, in fact, a bubble. Then, the myths of such a bubble are what need puncturing. So it is today with oil prices, which this week hit a record US$139.89 a barrel.

Is demand actually decreasing in India and China? No, demand is still rising; it is the rate of increase of demand that is declining, and also not by much. Or, perhaps, is oil a hedge against dollar weakness? “The dollar,” said Canadian Finance Minister Jim Flaherty at the Group of Eight (G-8)meeting of his colleagues last weekend in Osaka, “is a market currency.” And “one does not
interfere with a market currency”.


The G-8 finance ministers basically admitted there was not much they could do about the recent worldwide increases in the price of oil, which has more than doubled from a year ago, or, for that matter, other commodities. All that they could bring themselves to do was to commission a study from the International Monetary Fund to determine what effect speculators may be having on oil supplies.

So are oil prices in a “bubble” manipulated by speculators, as American financier George Soros told a US Senate committee earlier this month? Soros is not hands-on enough today to be accused of venting frustration at having to cover massive shorts as the price of a barrel shot close to $140 towards the end of the first week of the month. (He retired from day-to-day fund management some time after his September 1982 coup against the British pound.) Indeed, he warned in that same testimony that he does not consider himself an expert on the oil market and stays away from it. Clearly, his finesse at hedging remains unimpaired.

In fact, hedging is not so far from the heart of the matter. The US futures exchanges may alter their reporting format in the foreseeable future so as to separate futures contracts for delivery from those typically canceled and renewed for the following month, which practice creates statistics that some think inflates reported oil demand. This matter is at the center of the successful negotiations last week by the US Commodity Futures Trading Commission (CFTC) to close the “London loophole”.

Asia Times Online