Thursday, May 15, 2008

Wall Street's role in rising energy prices

It has been extremely clear for quite some time (several years) that neither demand by end consumers nor supply by producers has been responsible for the steep rise in energy prices, but the media, even the financial media, has been quite slow to pick up on this. It was good to see an improvement on this front with an article on MarketWatch by David Weidner entitled "Wall Street's crude ways - Commentary: How traders and hedge funds fuel runaway energy costs" which gives more than the usual amount of color to the issue, telling us that:

A boom in speculation and trading by investment banks and hedge funds has put our energy markets on steroids. Contract volume in the futures markets has risen by a third in just the last year. Oil closed at a record high of $125.96 a barrel on the New York Mercantile Exchange on Friday. That's double the price two years ago, a difference clearly caused by market manipulation.

We are not talking about individual mom and pop speculators or rogue traders or even maverick "financiers" such as George Soros, but about large-scale trading operations at many large hedge funds and many major financial institutions. Quite literally, everybody is doing it. Speculation per se is not bad, but when it becomes so pervasive and overwhelms "normal" trading by real producers and real consumers, then the markets cease to function normally.

It will be quite interesting to see whether the government investigations lead anywhere. It will be also interesting to see if the general media picks up on the scandal and turns it into the kind of headline story that gets the presidential hopefuls into the act.

-- Jack Krupansky


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