Speculation — but Not Manipulation

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Speculation. Manipulation. As politicians, business leaders, and ordinary consumers try to grasp the causes and effects of the historic surge in oil prices, attention turns to dark notions of exploitative financial maneuvering.

Are savvy traders cashing in — or even cornering some portion of the market — and thereby contributing to the painful runup that’s shaking everyone from airlines to commuters at the gas pump?


Sounding a populist note on the Presidential campaign trail, Senator Hillary Clinton (D-N.Y.) has called for “cracking down on speculation by energy traders and market manipulation in oil and gas markets.” ExxonMobil Senior Vice-President J. Stephen Simon, trying to deflect criticism of oil company profits, told a Senate panel on May 21 that speculation, along with geopolitical instability and a weak dollar, have created a “disconnect” between past price patterns and the current gusher to $131 a barrel. Motivated by a similar desire to direct outrage elsewhere, OPEC Secretary General Abdalla El-Badri also has stressed the role of traders in driving prices higher.

When oil jumps as much as it has, doubling since May, 2007, it’s natural to assume that something striking must have changed. Some say the world is running out of the stuff; others blame market manipulation. The search for a culprit is understandable.

But persuasive evidence of manipulation by traders is, so far, lacking. Speculation — placing bets on future prices — is another matter. There’s plenty of that, and it’s generally legal. In fact, there’s a good argument, if not conclusive proof, that sharply escalated trading in oil futures has contributed to price increases. But it’s important to remember that the nature of the oil market — specifically, the extreme inflexibility in both supply and demand — is amplifying whatever influence traders exert on prices.

Business Week