[URL=http://www.economist.com/displayStory.cfm?source=hptextfeature&story_id=11453090]The Economist[/URL] said:
Those who see speculators as the culprits point to the emergence of oil and other commodities as a popular asset class, alongside stocks, bonds and property. Ever more investors are piling into the oil markets, the argument runs, pushing up the price as they do so. The number of transactions involving oil futures on the New York Mercantile Exchange (NYMEX), the biggest market for oil, has almost tripled since 2004. That neatly mirrors a tripling of the price of oil over the same period.
But Jeffrey Harris, the chief economist of the Commodity Futures Trading Commission (CFTC), which regulates NYMEX and other American commodities exchanges, does not see any evidence that the growth of speculation in oil has caused the price to rise. Rising prices, after all, might have been stimulating the growing investment, rather than the other way around. There is no clear correlation between increased speculation and higher prices in commodities markets in general. Despite a continuing flow of investment in nickel, for example, its price has fallen by half over the past year.
By the same token, the prices of several commodities that are not traded on any exchange, and are therefore much harder for speculators to invest in, have risen even faster than that of oil. Deutsche Bank calculates that cadmium, a rare metal, has appreciated twice as much as oil since 2001, for example, and the price of rice has risen fractionally more.
Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market. The contracts are really a bet about which way the price will go and the number of bets does not affect the amount of oil available. As Mr Harris puts it, there is no limit to the number of “paper barrels” that can be bought and sold.
That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite. Ultimately, says David Kirsch of PFC Energy, a consultancy, there is only one type of customer for crude: refineries. If speculators on the futures markets get carried away, pushing prices so high that refineries run at a loss, they will simply shut down, causing the price to fall again. Moreover, speculators do not always assume that prices will rise. As recently as last year, the speculative bears on NYMEX outweighed the bulls.
