The New York Times writes that oil prices have been remarkably stable over the last year, settling into what it calls a “sweet spot” for the economy.
But the story has a major missing piece in its discussion of why prices have stabilized:
Energy experts say that several far-flung global developments have converged to put supply and demand in relative equilibrium, at least for the time being.
Members of the Organization of the Petroleum Exporting Countries have remained fairly disciplined in complying with their announced production cuts. Meanwhile, among non-OPEC producers, growing oil output in Brazil, Russia and the Gulf of Mexico has counterbalanced production declines in the North Sea, Alaska, Venezuela and Mexico.
On the demand side, growing appetites for oil in China, India and other developing nations have been offset by declining demand in the United States and Europe, because of their slowing economies, conservation efforts and growing use of biofuels.
Conspiciously absent: Speculation by traders.
This isn’t some conspiracy theory. The Commodity Futures Trading Commission itself said last summer that traders were responsible for much of the wild swings in prices in 2008, including when oil skyrocketed to nearly $150 a barrel. Here’s The Wall Street Journal last July:
The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices — a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors…
Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel.
And the Times’s own DealBook in August:
A new academic study contends that speculation by financial players like banks, hedge funds and index funds was behind the steep rise in oil prices last year and says that the Commodity Futures Trading Commission used models that were “not adequate” when it argued that speculation was not a major factor in the oil price spike…
Last month, Gary Gensler, the chairman of the commission, reversed the agency’s opinion on the matter and said at a hearing that excessive speculation by commodity traders might have played a major role in the swings in energy prices over the last few years.
This story got altogether too little coverage, and now the Times itself has apparently forgotten about it. Why? After all, not much makes Americans madder than $4 a gallon gasoline.
So this remains a good story to look into. Have curbs on speculation or increased scrutiny of it helped stabilize the oil markets?
(As disclosure: I have some of my IRA in an oil index fund.)
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