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Oil market thumbs its nose as Congress questions price surge

May 20, 2008 |  7:55 pm

The Senate hearing today on commodities -- and whether investors/speculators are responsible for driving prices to heights unwarranted by fundamental demand -- had at least the standard dose of demagoguery, near as I could tell from 3,000 miles away.

"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can’t afford it," said Sen. Joe Lieberman, (I-Conn.), whose Homeland Security and Governmental Affairs Committee called the hearing, which I previewed here.

Lieberman At least for today, Lieberman’s threats didn’t appear to frighten many investors/speculators out of the oil market: Crude futures jumped to yet another record high, gaining $2.02 to $129.07 a barrel in New York. (Perfect backdrop for the hearing.)

Jeffrey Harris, chief economist for the Commodity Futures Trading Commission, testified for the fundamentalists, presenting a load of charts to support the CFTC’s case that you can’t blame speculators for what’s happened with raw materials prices. "The economic data show that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand," he said.

CFTC data show that "the level of speculation in agriculture commodity and the crude oil markets has remained relatively constant in percentage terms as prices have risen," Harris said.

But back in Lieberman’s home state, consulting firm Greenwich Associates put out a report today that took more of a middle ground: "While the long-term fundamentals of global energy and other commodities markets are being driven by increasing demand, there is little doubt that, in the immediate term, speculative investors are driving up both trading volumes and prices," wrote Greenwich analyst Andrew Awad.

His study found that more than a third of the hedge funds, pension funds and other big investors now active in commodities have been playing in these markets for less than three years.

Let’s see, oil was $50 a barrel three years ago. Now we’re at $129, a 158% jump. We know that global oil consumption hasn’t risen by that amount in three years. (And I’m not suggesting the relationship would be linear, but you get the point.)

Here’s the bottom line: If oil and grain prices keep rising, you won’t be able to keep Washington from interfering in commodity markets -- even if there are good arguments that the imposition of restrictions on investors or speculators could make matters worse.

So if there is a cabal out there that’s manipulating commodity prices, this would be a good time for it to engineer a spectacular sell-off.

Photo: Sen. Joe Lieberman. Matt Campbell/EPA

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