News / Economy

Oil Price Rise Fueled by Investment Funds

Prices posted at a US gasoline station, April 20, 2011
Prices posted at a US gasoline station, April 20, 2011
Greg Flakus

As the price of crude oil rises on world markets, complaints from consumers, industries and politicians are also on the rise. Some blame the Organization of Petroleum Export Countries, the cartel known as OPEC, while others blame unrest in the Middle East and North Africa and still others blame market speculators.

U.S. Attorney General Eric Holder has formed a Financial Fraud Enforcement Task Force Working Group to look into possible fraud in energy markets, but the price may be driven more by investment trends.

Energy analysts see some of the usual factors driving oil prices this year, including increased demand in rapidly developing nations like India and China, restrictions on drilling in some areas like the eastern coast of the United States and unrest in oil-producing countries like Libya.  But petroleum has also become a favored asset for investors looking for future profits and their dollars sometimes distort the market.

Most investment money these days, from individual investors as well as from institutions, charitable groups and even governments, is now in various types of managed funds. Tom Kloza of the Oil Price Information Service says the managers of those funds can have a big impact on commodity prices, including the price of oil.

"Probably no one is breaking any rules, but a couple of key strokes by a money manager can move millions and billions of dollars into a market, and affect the price of something which is a life blood for consumers and people on the margins of society all over the world," said Kloza.

He says governments can't eliminate all speculation from the market, but that some kind of regulation is needed, especially outside the United States.

"I think unfettered is unforgivable and oil futures markets, particularly offshore, are largely unfettered," he said.

Speaking at a meeting in Kuwait this week, OPEC Secretary General Abdalla El-Badri said world oil prices are now being driven more by speculation than supply and demand.  Kloza and other analysts do not believe speculation plays a large role in the price rise, but they are not putting all the blame on OPEC either.

Saudi Arabia, the OPEC member nation with the world's largest reserves, has cut back on some of its production, thereby limiting supply and driving up prices, according to OPEC critics. But Tom Kloza believes OPEC leaders themselves are concerned about high prices.

"I think that many of the moderates, the doves within OPEC, are very uncomfortable with where prices are heading, because if we keep heading at this pace, we will open the door for some alternative technologies that would otherwise need subsidies or some sort of government give outs," said Kloza.

Some non-OPEC countries, particularly China, may be playing a big role in driving up oil prices and not just through their demand, according to Peter Zeihan, Vice President of Analysis at the global intelligence company Stratfor in Austin, Texas. He agrees with Kloza that investment in oil is the key factor, but he says the increase in money available to invest is also important.

"Back in the year 2000 the investing community as a whole made up about 10 percent of long positions in the oil market and now they are up to 40 percent," said Zeihan. "So you add that many new players and that much new money, but you do not add any more than a 10 percent increase in oil supply and, of course, you are going to have higher prices."

While that investment money comes from all over the world, Zeihan says one of the most significant contributors has been China, which takes in dollars from the United States and other nations that import its products. He says China has put much of that money into oil futures.

But the Stratfor analyst says the fundamental laws of supply and demand always win out eventually and then, as happened in 1998, 2001, and, most recently and dramatically in 2008, the price drops.

"Sooner or later the fundamentals are going to overpower the investor fervor," he said. "It happens every few years. Eventually the fundamentals will overpower any exuberance on the market and you will have a sudden, rapid sustained price drop over the course of a few weeks."

Zeihan is not predicting when that will happen. In the meantime, he sees signs that higher prices are encouraging more conservation and driving sales of fuel-efficient cars, but he does not see the development of an alternative to oil any time soon.

"In the United States we have proven that high prices were certainly exactly what was necessary to make hybrids very popular, but in terms of any other energy source, there is really nothing on the horizon," he said.

Zeihan says there is no other transportation fuel as dense in energy, as flexible and as easy to transport and use as petroleum.  Natural gas from shale  may help alleviate some of the U.S. demand, he says, but that will require a big investment in infrastructure.  He says electric cars, recharged from power supplied by expanded nuclear plants, looked promising until the recent nuclear accident in Japan. For the foreseeable future, Zeihan says, the world depends on oil and consumers will have to put up with the frequent price fluctuations.

You May Like

Tunnel Bombs Highlight Savagery of Aleppo Fight

Rebels have used tunneling tactic near government buildings, command posts or supply routes to set off explosives; they detonated their largest bomb this week under Syria's intelligence headquarters More

Sierra Leone Launches New Initiative to Stop Ebola Spread

Government hopes Infection and Prevention Control Units, IPC, will help protect patients and healthcare workers More

UN Official: Fight Against Terrorism Must Not Violate Human Rights

UN High Commissioner for Human Rights says efforts by states to combat terrorism are resulting in large scale rights violations against the very citizens they claim to defend More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Video Claims to Show Shia Forces in Iraq Executing Sunni Boyi
X
Jeff Seldin
March 05, 2015 2:36 AM
A graphic mobile phone video is spreading on the Internet, claiming to show Iraqi forces or Shia militia executing a handcuffed Sunni boy. Experts have yet to verify the video, but already Islamic State followers are publicizing it across social media, playing on deep-rooted sectarian fears. VOA’s Jeff Seldin reports.
Video

Video Video Claims to Show Shia Forces in Iraq Executing Sunni Boy

A graphic mobile phone video is spreading on the Internet, claiming to show Iraqi forces or Shia militia executing a handcuffed Sunni boy. Experts have yet to verify the video, but already Islamic State followers are publicizing it across social media, playing on deep-rooted sectarian fears. VOA’s Jeff Seldin reports.
Video

Video Ukrainian Authorities Struggle to Secure a Divided Mariupol

Since last month's cease-fire went into effect, shelling around the port city of Mariupol has decreased, but it is thought pro-Russian separatists remain poised to attack. For the city’s authorities, a major challenge is gaining the trust of residents, while at the same time rooting out informants who are passing sensitive information to the rebels. Patrick Wells reports for VOA.
Video

Video Volunteer Gauge-Watchers Help Fine-Tune Weather Science

An observation system called CoCoRaHS is working to improve weather science, thanks to thousands of volunteers across the country who measure precipitation in their own backyards, then share their data through the Internet. VOA's Shelley Schlender reports.
Video

Video NASA Spacecraft Approaches a Dwarf Planet

NASA’s Dawn spacecraft will make history on Friday, March 6, when it becomes the first man-made object to orbit a dwarf planet named Ceres. It is located in the asteroid belt between Mars and Jupiter, almost 500 million kilometers from Earth. Among other objectives, Dawn will try to examine two mysterious bright white spots detected on the planet’s surface. VOA’s George Putic has more.
Video

Video Young Muslims Radicalized Online

Young Muslims are being radicalized ‘in their bedrooms’ through direct contact with Islamic State or ISIL fighters via the Internet, according to terror experts. There are growing concerns that authorities and Internet providers are not doing enough to counter online extremism - which analysts say is spread by a prolific network of online supporters around the world. Henry Ridgwell reports from London.
Video

Video African Americans Recall 1960s Fight For Voting Rights

U.S. President Barack Obama and thousands of people will gather in the small southern U.S. city of Selma, Alabama, Saturday, March 7 to commemorate the 50th anniversary of a historic voting rights march that became known as “Bloody Sunday." VOA’s Chris Simkins traveled to Alabama and introduces us to some of the foot soldiers of the voting rights struggles of the 1960s.
Video

Video Positive Messaging Transforms Ethiopia's Image

Ethiopia was once known for famine and droughts. Now, headlines more often point to its fast-growing economy and its emergence as a regional peacemaker. How has Addis Ababa changed the narrative? VOA's Marthe van der Wolf reports.
Video

Video Cyber War Rages Between Iran, US

A newly published report indicates Iran and the United States have increased their cyber attacks on each other, even as their top diplomats are working toward an agreement to guarantee Iran does not develop a nuclear weapon and to free Iran from international sanctions. The development is part of a growing global trend. VOA’s Al Pessin reports from London.
Video

Video Answers Elude Families of MH370 Passengers

For the families on board Malaysia Airlines flight MH370, an airline official’s statement nearly one year ago that the plane had lost contact with air traffic control at 2:40 AM is the only thing that remains confirmed. William Ide reports.

All About America

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

World Currencies

EUR
USD
0.8954
JPY
USD
119.75
GBP
USD
0.6515
CAD
USD
1.2518
INR
USD
61.921

Rates may not be current.