BusinessWeek reports that the Senate is holding hearings to assess how much pension funds and sovereign wealth funds are contributing to high oil prices. It notes that May 20th testimony before the Senate Committee on Homeland Security & Governmental Affairs from Michael Masters, a hedge fund manager, suggests that "index speculators" are the primary cause of the recent price spikes in commodities.

In this post, I suggested that supply and demand figures would mean a drop in price. But I found a source suggesting that speculators account for 60% of oil trading volume. The Index speculators about which Masters testified include institutional investors like corporate and government pension funds, university endowments, and sovereign wealth funds. And he suggests that they're betting on a drop in the dollar and a rise in the price of oil as an inflation hedge.

But Masters also argues that traditional speculators -- which include The Goldman Sachs Group (NYSE: GS) whose oil analyst forecasts $200 a barrel oil -- are able to take advantage of a loophole in regulations of the Commodity Futures Trading Commission (CFTC) which permits unlimited speculation.

This so-called "swaps loophole" exempts investment banks from reporting requirements and limits on trading positions that are required of other investors. The loophole allows pension funds to enter into a swap agreement with an investment bank, which can then trade unlimited numbers of the contracts in futures markets.

While nobody seems to know how much of the price of oil is due to speculation, if the swaps loophole closed and the price of oil dropped, we'd have a pretty good guess. In the meantime, it would be interesting to know how much money Goldman is making in this speculation. This would not be the first time -- Ben Stein in the New York Times accused Goldman of profiting from its bearish forecast on subprime as well.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs securities.