Expert: Speculation Drove Up Oil Prices

Fine: Lehman Brothers, others drove oil barrel prices up

Expert blames speculation for price volatility, supports regulation
The following article appeared in the January 23-29, 2009, edition of the New Me
xico Business Weekly. This text is copyrighted and is being reproduced with perm
ission of the N.M. Business Weekly.
By Kevin Robinson-Avila
New Mexico Business Weekly Staff
The sudden crash in oil prices might be the smoking gun that shows speculation,
rather than supply and demand, drove the huge run-up in oil futures last year.
Daniel Fine of the New Mexico Institute of Mining and Technology’s Center for Ener
gy Policy told participants at a forum in Albuquerque Jan. 16 that massive, spec
ulative trading by investment banks like Lehman Brothers, hedge funds and others
is what drove oil above $140 per barrel.
It created a “colossal energy price bubble,” said Fine, a former MIT research associ
ate and contributing editor on natural resources for BusinessWeek.
“Like real estate, the energy bubble was based on excessive, open credit that allo
wed big investment firms to instantly arrange contracts without putting anything
up,” Fine said. “No deposit or letter of credit was needed.”
After Lehman Brothers folded in September, investigators found it held 10,000 oi
l contracts of 1,000 barrels each, Fine said.
Once speculative borrowing ended, oil prices plummeted to below $35 per barrel,
which Fine said can’t be explained by supply and demand.
“At this point, total world demand for crude has fallen just two percent,” Fine said
. “U.S. demand since the peak is down less than five percent. I say it’s not supply
or demand, it’s fall out of speculation and the relative absence of credit from th
e financial services industry.”
Bob Gallagher, president of the New Mexico Oil and Gas Association, agreed that
speculation played a major role, but said current prices are too low.
“Nearly $150 per barrel was ridiculous, but so is $35 per barrel,” Gallagher said. “We’v
e got to get the speculators out and find the fine line between supply and deman
d. I believe the real price would be between $75 and $80 per barrel.”
Forecasts vary, but Fine said most market analysts expect prices to slowly climb
over the next two years to somewhere between $60 and $80 per barrel.
To minimize speculation, Fine called for tighter regulations, such as greater tr
ansparency on domestic and foreign commodity exchanges and higher margin require
ments for contract deposits.
U.S. Sen. Jeff Bingaman, D-NM, supported such policies last year as chair of the
Senate Committee on Energy and Natural Resources.
Bingaman spokesperson Jude McCartin said the senator will introduce new regulato
ry proposals this year.
“He will soon unveil energy legislation that includes measures to protect against
speculation,” McCartin said.
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