The Petrodollar Bubble Pump

…Why did the prices of oil and other commodities rise so much? The reason is simple–hedge funds funded indirectly by commodity producers pumped huge amounts of cash into commodities.

We do not disagree that oil demand has been rising and oil supply is relatively constrained. But an oil industry expert we have known for years argues that if top oil industry insiders believed oil prices would exceed $60 per barrel for at least several years, tremendous amounts of new supply would come online not only from greatly enhanced drilling but from nontraditional sources such as oil shale and tar sands.


We believe oil prices of $100 per barrel are due solely to inflows into hedge funds that use some of their new money to buy commodities. Funds of hedge funds typically allocate a portion of their new money to commodities. Where do hedge funds get a good deal of their new money? We think much of it comes from commodity producers. In other words, commodity producers were using some of the additional cash generated from higher commodity prices to invest in commodities, which in turn drove commodity prices higher still.

In the past few years, inflows into hedge funds have averaged about $30 billion per month, and about two-thirds of that money was from funds of funds. We guess most of the new money was from commodity producers, which include the rulers of many countries who treat their nations’ treasuries as their personal checking accounts. We also guess that a substantial portion of the windfall commodity producers have been generating flowed into equities through the family offices otherwise known as sovereign wealth funds.

Forbes