Speculation in Crude Oil Markets

April 2, 2008
11:19 AM
Tomorrow at 9:30 a.m. in Dirksen 366, Senate ENR will drill into an issue that Congress has puzzled over for years: how speculation in financial energy markets is contributing to the high price of oil. Specifically, the committee will examine the role of non-commercial, institutional investors in determining crude oil prices.
It’s worth noting that crude oil is the world’s most actively traded commodity.  As with other energy commodities, there are several physical and financial markets in which crude oil is bought and sold.  As the demand for physical barrels of oil has grown, so has the demand for “paper barrels” (as a financial asset).  Untangling whether and how these multiple markets may be operating in concert — and potentially impacting prices — is a complex and challenging task.
Certainly, there is a broad recognition that the fundamentals of global supply and demand explain much of the current oil price.  But in addition to these factors, there have been a number of important developments in financial energy markets in recent years that also impact prices.  These include a dramatic increase in trading in the oil derivative markets and the participation of new classes of traders, which raise questions regarding the degree of regulatory oversight applied to physical petroleum markets.
A panel of six witnesses will tackle the topic tomorrow.  Should be a lively discussion.
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