The Saudi Arabian government announced recently that it would host a conference inviting the world's prominent oil producers and consumers to have a discussion on runaway oil prices in the international market. On June 6, untamed crude oil prices hit another new high, closing at $138.54 a barrel. Goldman Sachs, a U.S. investment advisory institute, predicted that it would shoot up to $200 per barrel in the following two years. The skyrocketing oil prices do not showcase the essential relationship between demand and supply; instead, they are bubbles catalyzed by international speculative capital.
Since July, 2007, when the sub-prime loan crisis broke out in the U.S., international speculative capital such as hedge funds began pouring bulky investment into futures markets in a bid to reduce and avert risks by turning to oil, agricultural products and metal futures for profits (hedging) in a backdrop of the devaluation of the U.S dollar, surging global inflation and fluctuation of primary financial markets in the world at large. Statistics show that, compared with 2003, speculative capital currently storming into the international futures market has grown nearly 20 times up to $260 billion, of which more than half has been invested in oil futures transactions.
The present contract volume of oil futures, stockpiled by speculative capital, has surpassed one billion barrels. The hidden hand behind the speculative capital will not keep oil in holding but buy in futures contracts and then wait for market information in order to deal with the piled contracts following strategies of "buying low, but selling high; or buying reasonably high, but selling much higher.” In so doing, oil prices will constantly be jacked up for speculators to win hedging. Lehman Brothers, a global investment bank, suggested that on average $ 100 million of speculative capital would push up oil futures prices by 1.6 percent.
A frenzy of purchases in oil futures contracts has create demand bubbles – a fancy version of extra demands for oil – and ignited the recent sharp increase in oil futures prices. Additionally, the speculators could also draw upon other relevant factors, like the rise in oil consumption, weak dollar and geopolitical change, to make a decent profit on their speculative dealings. By the force of some oil futures barons, the oil-price bubble has increasingly puffed up.
Since 2003, the US dollar has been weakening, with its parity rate to the world's main currencies now devaluated by over 25 percent. On the other hand, the global demand for oil has risen by 8 percent. Meanwhile, international oil prices have shot up by 277 percent. It is evident that the untamed surge in oil prices stems from speculative activities in the oil futures market.
Beyond this, the obvious monitoring loopholes in international futures transactions also contribute to these speculative activities. Especially in recent years, bulky oil futures dealings have been concluded on OTC market – namely over-the-counter – through an electronic trading platform. By American laws, the U.S. commission for commodity dealings is only held responsible for monitoring regular trading markets, rather than the OTC market or off-exchange market, which creates a hotbed for buoyant speculative activities.
Skyrocketing oil prices forced upward by speculative activities have already posed a serious menace to global energy security and overall economic growth. According to the minutes of the Fed's April 29-30 monetary policy meeting, U.S central bank policy makers have grown pessimistic on the growth of its economy. The Fed is now forecasting that economic growth is likely to hover between 0.3% and 1.2% in 2008—down from the 1.3% to 2% range, which was the Fed's previous forecast.
The U.S Senate released a survey report in June 2006 suggesting that $25 of the year's going oil prices of around $ 70/barrel was exclusively resulted from financial speculation. The financial baron, Soros, testified that the existing oil-price bubble could be disastrous: the over inflow of capital to the oil futures market will break the market balance. In addition, once the general tendency of the energy market alters slightly, speculative capitalists will flee in droves, leading to total market collapse.
By People's Daily Online
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