When the price of a barrel of oil hit a record $147, back in July 2008, the Bush administration asked Saudi Arabia to produce more crude in hopes that it would drive down the price. The Saudis agreed, but did warn the administration that it was Wall Street speculation and not a shortage of oil that was pushing up prices. Saudi Oil Minister Ali al Naimi told U.S. Ambassador Ford Fraker that the Saudis would have trouble finding customers for the additional oil, according to a confidential State Department cable dated Sept. 28, 2008,
“Saudi Arabia can’t just put crude out on the market,” Naimi said, and that”speculators bore significant responsibility for the sharp increase in oil prices in the last few years,”.
Despite a weak demand, the price of a barrel of oil has gone up more than 25 percent over the past year. Just like the Bush administration before it, the Obama administration has been slow to regulate oil speculators, but the Commodity Futures Trading Commission recently charged a group of financial firms with manipulating the price of oil in 2008. Despite these charges the commission hasn’t enacted a proposal to limit the percentage of oil contracts a financial company can hold, while Congress remains focused primarily on big oil companies, debating whether to eliminate tax breaks for an industry in which the top six U.S. companies earned $38 billion in first-quarter profits.
The Saudis have apparently been saying for years that something should be done to curb the influence of banks and hedge funds that are speculating on the price of oil, according to diplomatic cables made available by the WikiLeaks website. The cables show that the subject of speculation has been raised in working group meetings between U.S. and Saudi officials, in one-on-one meetings with American diplomats and at least once with President George W. Bush himself. Saudi officials explained that they have two primary concerns about artificially high prices: that they’ll dampen the long-term demand for oil and that the wide price swings typical of commodity speculation make it difficult for them to plan future oil field development. After that $147 a barrel peak in 2008 prices plunged to $33 a barrel as we entered into a global financial crisis.
Dr. Majid al Moneef, Saudi Arabia’s OPEC governor, explained his understanding of the full impact of speculation to U.S. Rep. Alan Grayson, D-Fla., back in July 2009. Moneef said Saudi Arabia suspected that “speculation represented approximately $40 of the overall oil price when it was at its height.” He also suggested that we need “improved transparency”, a reference to the fact that most oil trading is conducted outside regulated markets, and better communication among the world’s commodity markets so that oil speculators can’t hide the full extent of their trading positions.
Moneef also suggested that the U.S. consider “position limits”, restrictions on how much of the oil market a company can control, something the CFTC is considering. But the proposal to prevent any single trader from accumulating more than 10 percent of the oil contracts being traded hasn’t received final approval, and the CFTC also has yet to define what it considers excessive speculation.
Today, speculators who’ll never take possession of a barrel of oil account for 70 percent of oil futures trading, and the volume of speculative trading has grown fivefold.