Oil's Toughest Question

NEW YORK (TheStreet) -- This last week has seen an avalanche of articles, papers and opinion pieces attacking the idea that oil and gasoline prices are affected by speculation, in response to President Obama's recent plan to try and bolster the enforcement resources of the Commodity Futures Trading Commission against speculation.

This plan, which the president knows has no chance of passing through Congress in an election year, has been dismissed as populist political gamesmanship, not to be taken seriously.

President Obama visited an Oklahoma pipeline yard in March.

But just because an argument is populist sounding does not make it untrue. It is a shame that the president is proposing such small and ultimately fruitless changes in the oil market mechanism, because investment and trade in oil has certainly added $30 and perhaps more like $40 dollars a barrel to the price.

Very well-respected and strong economic arguments on the ineffectiveness of money pouring into the oil markets since 2003 have appeared recently in Foreign Affairs magazine, on the Center for Economic Policy Research Web site, as an editorial on Bloomberg and on the Chicago Mercantile Exchange Web site, to name just a few of the heavy hitters.

Wow -- this is quite an army of heavy minds summarily dismissing many of the conclusions I came to in my book on economic influences exerted in the oil markets, Oil's Endless Bid.

I read each of these reports with great interest and except for the one-page chart advanced by the CME, I also noted with interest that none of the other economists weighing in on this issue had ever had direct engagement with a futures market, either from the sell or the buy side.

I believe that many of the arguments advanced, even from the most learned of the economists, can be argued successfully and convincingly from the other side -- I believe I tackle and conquer most all of their real and counter-factual arguments in my book. But one issue continues to haunt them, one question that I don't believe any of them has ever even attempted to answer, because they can't: What happened to all the money?

It's a simplistic question to ask but still sums up the fundamental issue of "speculation in oil": Where is all the money? All detractors to the oil speculation argument will readily admit to an influx of nearly $200 billion dollars buying oil futures from indices since 2003.

But far more influential and what they are unable to track, is the amount of money driven into the oil market by hedge funds buying oil against rising stock indices and dropping dollar indices. Now, add in the trade from over-the-counter risk-management programs that have a nominal value of somewhere near $6 trillion dollars in oil alone and what you have is clear: A virtual deluge of buyers accumulating over the last 10 years, with a tiny respite for a global breakdown of asset markets in 2008.

In commodities, every buyer needs a seller and only one variable can generate sellers into a financialized market that doesn't naturally have any -- a continually higher price.

So tell me: Where did all the money go? Who is willing to argue that the buying from the hedging of $6 trillion dollars of derivatives and $200 billion of index buying and rising stock markets has had no influence on the price of oil?

Let's be clear: Most of this money is not the kind of nefarious investment with diabolical manipulative intent implied by the president's latest proposals. Most of it is "honest" investment in oil, smart hedgies recognizing patterns between oil and other asset markets and the strong success of oil marketers to develop a new world of oil participants under the rubric of "risk management," fueling their own profit models.

But who cares where it comes from when it inevitably skews what people are forced to pay at the pump? And if you argue that I'm wrong, you'll still have to show me: Where did all the money go?

At the time of publication, the author had no positions in any of the stocks mentioned.

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