Speculators busier as crude oil cost spikes OIL PRICES

Traders in the oil options pit work at the New York Mercantile Exchange, September 9, 2008. Crude oil was trading around $103 a barrel at mid day after OPEC ministers were to hold a meeting and hurricane Ike was heading towards Gulf of Mexico oil platforms. REUTERS/Chip East (UNITED STATES) less Traders in the oil options pit work at the New York Mercantile Exchange, September 9, 2008. Crude oil was trading around $103 a barrel at mid day after OPEC ministers were to hold a meeting and hurricane Ike ... more Photo: Chip East, Reuters Photo: Chip East, Reuters Image 1 of / 1 Caption Close Speculators busier as crude oil cost spikes 1 / 1 Back to Gallery

Speculators now account for half of all traders in the main U.S. oil market, and their growing presence coincided with this decade's historic rise in the price of crude, according to a new Rice University study.

Released Thursday, the study does not try to prove that speculators caused the price spike, as many politicians and consumer advocates believe.

But the authors note that prices rose steadily along with the number of speculative investors, and fell with them as well. Seven years ago, speculators accounted for 20 percent of oil traders on the New York Mercantile Exchange. That number jumped to 55 percent by the time oil prices reached their all-time peak above $145 per barrel last summer. Now oil costs $72, and speculative investors account for half the traders.

The study is sure to fuel the simmering debate in Washington over tightening regulation of the oil markets.

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"It's a complex issue, but these are inescapable facts that need to be part of the debate," said Ken Medlock, one of the authors and an energy research fellow at Rice's James A. Baker III Institute for Public Policy.

Medlock and co-author Amy Myers Jaffe link the rise of speculators to a federal law, passed in 2000, that loosened oil market regulation.

The government limits the number of oil contracts that each speculator can hold. But under the Commodity Futures Modernization Act, trades on electronic exchanges or overseas markets don't count toward those limits.

"You can't blame speculators, because they're doing exactly what you'd expect them to do," Medlock said. "They're taking larger and larger positions, because the regulations are flawed. If you want to blame someone, blame legislators."

The study uses data from the Commodity Futures Trading Commission, a federal panel that recently held hearings on increasing oil market regulation. Speculators are defined as traders who use oil strictly as a financial investment, those who will never take delivery of a tanker-full of crude.

Consumer advocates who have spent years complaining about the 2000 law welcomed the study, hoping it will add to the momentum for changing the rules.

"This confirms what we and others have said for some time," said Tyson Slocum, director of the energy program at the Public Citizen watchdog group. "The good thing from the oil price run-up of 2008 is it has forced Congress to realize there's a problem in these markets, and the answer is re-regulation."

The financial industry opposes tightening the regulations, saying it would restrict the number of investors in the market and possibly give a handful of players greater control.

"We have just emphasized that those market participants who don't actually receive physical delivery play an important role in the markets, and limiting people's access to those markets just ends up pushing market share into a smaller number of hands," said Andrew DeSouza, spokesman for the Securities Industry and Financial Markets Association.

The study also warns that oil may be caught in a vicious cycle with the U.S. dollar.

Many investors fleeing a weakened dollar have put their money into oil. But that pushes up the price of oil, which increases America's trade deficit because the country imports so much petroleum. Rising trade deficits further weaken the dollar.

"There's been a significant, structural change in the way oil and the dollar are linked," Medlock said. "It makes monetary policy much more difficult, frankly."

Read the full study at www.bakerinstitute.org/oil-futures-speculation.