NCPA - National Center for Policy Analysis


August 7, 2009

For more than a year now, oil speculators have been in the cross hairs of Congress, regulators and even oil traders, who blame them for $4-a-gallon gas last year.  But as oil funds have started to dump shares, they have helped to tame costs, says the Associated Press (AP).

The U.S. Oil Fund, the first exchange-traded fund of its kind, allows anyone to participate in energy markets without having to find a place to stash a 42-gallon barrel of oil or other commodities like natural gas.  Since it was founded, the volume of trades made on the New York Mercantile Exchange has exploded, backed by billions of investor dollars.

Instead, of sending oil prices spiking or tumbling, the funds may actually have an elastic effect on markets, pulling prices up from severe lows and highs, says the AP:

  • Economists show that investors in the widely tracked Standard & Poor's GSCI index and the Dow Jones-UBS Commodity Indexes don't drive energy prices.
  • In fact, index traders bought fewer oil contracts when prices spiked last year, and they bought more when prices started to plunge in the fall.
  • As a result, they may have kept energy prices from skyrocketing even higher last year and plunging even further in January.

Yet, opinions about the affect of index funds remain sharply divided, says the AP:

  • Critics advocate getting rid of the funds saying that they don't serve much of a purpose and are not trading on supply and demand.
  • But speculators say that it's not realistic to expect energy commodities to behave in a rational way.

Nevertheless, the influx of speculators has fundamentally changed the way oil is traded.  The influx of money may actually have helped prevent a collapse in crude prices that could have led oil companies to cut spending on exploration and production, says the AP.

Source: Chris Kahn, "Big oil speculator defends practice in Washington," Associated Press, August 4, 2009.


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