Don't Worry About Today's Retirees: Boomers Are Fine, (but Gen X…
$600 Million Powerball: 1 Winning Ticket Sold in Fla.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.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
Reader Comments (Page 1 of 1)
5-23-2008 @ 9:48AM
ed arum said...
I agree that speculation accounts for 60% of the price per barrel. I have a school consortium that purchases fuel oil. this year we bought 5.5 million gallons at $2.05 and now the price could be well beyond $4.00. This means an additional $10 million dollars schools must find in other areas of their budgets. How can schools move foreward if fixed costs are growing at this rate. We need for the price to drop "big time."
6-06-2008 @ 12:12PM
Jim Crismon said...
And when the price of oil unexpectedly drops and the speculators can't cover their positions, these investment banks will be the first in line to be bailed out by good old Uncle Sam aka "the taxpayers"
7-09-2008 @ 7:23PM
joe sarchenko said...
I read in another comment that they dreamed Lehman Bros was borrowing money from the discount window and going long on oil to boost their capital base. Think about that, when did this last spike in oil start? I think congress should do some serious investigation into this possibility as taxpayers are bailing out these overaggressive banks and then possibly paying for their greed through higher oil.
7-30-2008 @ 10:10PM
Chris Nielsen said...
Interesting how every time oil drops, Goldman Sachs issues a statement predicting $200 per barrel oil, and then the price per barrel shoots back up. Speculation indeed.