US Government may be culprit in oil price surge

Date: Wednesday, August 13, 2008
Author: David Walker, Financial News Online

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Politicians in the US and the UK have blamed hedge funds and their involvement in the derivatives markets for the 11.3% rise in the oil price so far this year, despite analysis that suggests some arms of the US government could be more to blame.

Speculators including hedge funds controlled 48% all open interest in US oil markets in early August, however the US postal and prison systems were highlighted by market analysts VM Group in a report for Belgian bank Fortis Bank as partly responsible for increased demand and higher prices for energy.

US regulator the Commodity Futures Trading Commission has reclassified trading in the energy markets previously assigned to non-speculative participants, as trading conducted by speculators. This revision in July boosted the number of oil futures contacts held by speculators to 48% in July, a rise of 25%.

The CFTC classifies positions as commercial or non-commercial based on whether or not those participants who report their activities to the commission "are using the markets for commercial purposes, that is... for hedging or risk-management," the CFTC said.

Politicians have criticized speculators' levels of activity.

Senator Dick Durbin introduced a bill to the US Congress in June to strengthen the CFTC, while in the UK a Treasury Select Committee has begun an inquiry into the role of speculation in the oil markets.

Mike Cassell, analyst at VM Group, noted: "now that the specter of $4 per gallon gasoline has become a reality for American drivers and the warnings about rocketing winter fuel bills multiply, politicians have been scrambling to appease voters."

Dated Brent crude has risen by 11.3% this year, from $97.77 to $110.22 today, however it has fallen from the high of $145.66 it reached this year on July 3.

In the US, energy policy adviser the International Energy Agency has said politicians were seeking "an easy solution" to the problem of the surging oil price, rather than curtailing demand and improving its supply.

In the UK, Sir Bob Reid, chairman of the energy market ICE Futures Europe, has told the UK Treasury Select Committee speculators were not a driving force behind oil's price.

Cassell said that beyond energy derivatives markets the US government remains the "largest single energy user on the planet."

He said some departments of the US government had reduced their consumption of energy over the past 30 years, including the National Aeronautics and Space Administration and the Department of Energy.

The US Department of Defense, whose actions he said "are not usually consistent with energy efficiency," reduced its energy consumption from 87% of all US federal government use in 1975 to 78% last year.

The Department of Defense, which is responsible for about 21% of all US government energy usage, cut its consumption by 37% since 1975, he added.

Overall, the US government has cut its energy consumption by about 30% between 1975 and last year.

However, Cassell said the US postal service and penal system were "like two black sheep standing apart from the rest of the flock" when it came to energy use.

Over the past 30 years, the US postal service's energy consumption grew by 66%, including a 16% increase in the past 10 years, Cassell said.

He added the rise in America's prison population from about 500,000 in 1980 to about 2.2 million this year had helped fuel a 580% rise in the Department of Justice's energy consumption between 1975 and 2007.

The US government could not be contacted.

—Write to dwalker@efinancialnews.com