Blame $146 oil on speculators, US House told

Analysts have for some time now been arguing about how big a factor speculation has been in driving international oil prices sky high.

Finally, thanks to a US congressional investigation, there are figures that seem to confirm that it has indeed played a significant role. Conventional arguments put the voracious oil appetite of China and India as the main reason for the spike in prices.

Crude oil prices have gone up a staggering eight times in the past 10 years — from about $18 a barrel at the beginning of 1998 to $146 a barrel on Thursday. In the past one and a half years, prices zoomed by over 133%. Coming close on the heels of record-breaking food grain prices, this has sent shock waves around the world. The knives are out as big oil corporations, governments, oil exporting countries and investment bankers blame each other for this situation.

The US, as the largest consumer of oil — 24% of world output — has been burning midnight oil trying to find out the reasons behind this ruinous price rise. Over 40 meetings of various committees and sub-committees of the US Congress have been held in the past 11 months to investigate the inflamed oil market.

And the truth is slowly seeping out. In a hearing of the obscure Sub-Committee on Oversight and Investigations, held last week, it emerged that one of the main reasons propelling ever-higher commodity prices is the gigantic flow of speculative funds into the futures trading market.

This has been alleged many times earlier, but figures pinning it down have come out for the first time. Investments by pension funds, sovereign wealth funds and endowment funds in commodity futures increased from $13 billion at the end of 2003 to $260 billion in March 2008.

That's a 20-fold growth in less than five years. These figures have been calculated by Michael Masters, a fund management expert who testified before the sub-committee. His calculations are based on figures from US Commodity Futures Trading Commission, a regulatory body, and reports of various fund managers.

These funds have been buying up futures of 25 commodities. These include food items like coffee, cocoa, wheat, soyabean, sugar and cattle/hog; energy commodities like crude oil, petrol and natural gas; and metals — both base and precious.