Why is oil price rising? Speculators under scrutiny (News Feature)

By Chris Cermak Jul 9, 2009, 2:00 GMT

Washington - The world's addiction to oil has long been a source of consternation for politicians, especially in the West. Oil threatens the environment and national security, and most governments have promised to wean themselves off the fuel in the coming decades.

The rising cost of crude oil could now threaten the world's recovery from its worst economic crisis since World War II, and governments are starting to get worried.

The price of crude oil has been exceptionally volatile in the last year. It has nearly doubled since January, topping 70 dollars per barrel in June, even though the global economy and demand for oil remains sluggish.

Politicians are beginning to fear a repeat of the summer of 2008, when the price hit 140 dollars per barrel, sending petrol prices skyrocketing in the United States, sparking a serious energy crisis in many developing countries and sending economies reeling.

But the blame for the price increase has shifted. While oil producers in the Middle East have been criticized in the past for keeping supplies down, attention has now turned to the complex world of finance.

The United States and Europe have signaled possible crackdowns on oil speculators - the investors who trade daily in the fuel. They argue that the sharp price changes are not borne out by the small shifts in supply or demand for oil.

Authorities believe speculators may be pushing the price higher for their own gains. Crude oil futures, traded on the New York Mercantile Exchange, are at the centre of the dispute.

The Commodity Futures Trading Commission, a US regulatory agency, said this week it is considering tougher regulations on energy markets. That could mean limits on how much traders can bet at any given time.

'Governments can no longer stand idle,' French President Nicolas Sarkozy and British Prime Minister Gordon Brown wrote in an editorial published Wednesday in The Wall Street Journal. The oil price was 'seemingly defying the accepted rules of economics.'

The two leaders called for an international effort to boost transparency and supervision of oil markets. They warned that 'a new period of instability could undermine confidence just as we are pushing for recovery.'

Traders reject the accusations.

They responded that speculators are simply following expectations - prices are climbing because demand is likely to rise as the world economy recovers, especially in developing countries.

CME Group, which owns the New York Mercantile Exchange, argued in a report earlier this year that limiting trader volume will have little effect.

'There's really no substantial evidence that index trader or money manager participation causes increased volatility,' said Dave Lehman, director for commodity research at CME Group.

The possible government clampdown comes amid a wave of new financial regulations being proposed in the United States and European Union. Careless risks taken by Wall Street investors - largely in real-estate markets - are blamed for sparking a financial crisis that sent the global economy into a tailspin in October.

US President Barack Obama's administration last month proposed the most sweeping overhaul of financial regulation since the 1930s. The plan would extend the government's reach to virtually all corners of Wall Street and vastly expand the authority of the Federal Reserve to oversee major banks.