Oil prices tumbled by nearly 16 percent and settled on July 23 at $ 124.44 a barrel for the first time since July 11 when oil prices had shot up to a record high of $147.27 per barrel, shrouding the international crude oil market with growing fears that high prices and the weak economy are destroying demand.
Crude oil prices had been surging since January 22, and jumped by 71 percent within half a year before its decline beginning July 15. Goldman Sachs, a full-service global investment banking and securities firm, even then predicted international crude prices would hit $200/barrel in the following two years. However, the skyrocketing oil prices cannot actually reflect the basic relations between supply and demand; instead, they make up a bubble catalyzed by international speculative capital.
Since July 2007, when the sub-prime loan crisis broke out in the U.S, international speculative capital such as hedge funds began to heavily invest into futures markets in a bid to reduce and avert risks by turning to oil, agricultural products and metal futures for profits (hedging) in a backdrop of a depreciating U.S. dollar, surging global inflation and fluctuation of primary financial markets in the world at large. Statistics show that, compared with 2003, speculative capital currently storming into the international futures market has grown nearly 20 times to $260 billion, of which more than half has been invested in oil futures transactions.
The present contract volume of oil prices, stockpiled by speculative capital, has surpassed one billion barrels. The hidden hand behind the speculative capital will not keep oil in stock but buy into futures contracts and then wait for market information in order to deal with the piled contracts following strategies of "buying low, but selling high; or buying reasonably high, but selling much higher." In so doing, oil prices will be driven up so that speculators may succeed in hedging. The Lehman Brothers, a global investment bank, estimated that on average $ 100 million of speculative capital would push up oil prices by 1.6 percent.
A frenzy of purchases in oil futures contracts has created demand bubbles—a fancy term for additional demands for oil—and ignited a sharp increase in oil prices. Additionally, speculators could also draw upon other relevant factors, like the rise in oil consumption, weak dollar and geopolitical change, to reap a decent profit on their dealings. The oil-price bubble has been increasingly puffed up by the force of some oil futures barons.
Since 2003, the U.S. dollar has been weakening, with a parity rate to the world's main currencies now devaluated by over 25 percent. On the other hand, the global demand for oil has risen 8 percent. Meanwhile, international oil prices have shot up by 300 percent or more. It is evident that the untamed surge in oil prices stems from speculative activities in the oil futures market.
The U.S Senate released a survey report in June 2006 suggesting that $25 of the year's going price of about $70/barrel exclusively came from financial speculation. On top of that, skyrocketing oil prices forced upward by speculative activities have already posed a serious menace to global energy security and overall economic growth. Protests against the runaway oil prices have recently erupted in many countries in both Asia and Europe. The International Monetary Fund (IMF) has accordingly lowered its expectation index for this year's global economic growth in view of the sweeping inflation induced by soaring oil prices.
Fortunately, the U.S and some other countries began to face reality and take measures to burst the oil-price bubble. The U.S. House of Representatives in June passed the Energy Markets Emergency Act of 2008, directing the Commodity Futures Trading Commission (CFTC) to utilize all its authority, including its emergency powers, to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or any other unlawful activity that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities. Meanwhile, the CFTC launched a complete investigation of the case to find out whether international crude prices had been manipulated by speculative capital.
In response, the International Energy Agency (IEA) has already lowered its 2008 predictions of 2.2 million barrels by more than 50 percent for the global increments of the daily demand for crude oil and would in the coming days further lower its index. Therefore, it seems convincing that the oil-price bubble puffed up by outside forces will soon burst.
The financial baron, Soros, testified that the existing oil-price bubble could be disastrous: the overflow in incoming capital to the oil futures market will disturb the market balance. In addition, once the general tendency of the energy market alters slightly, speculative capitalists will flee in droves, leading to an overall meltdown of the energy market.
By People's Daily Online