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July 02, 2008

Bob Hodrick: Oil Prices Result of Market, Not Manipulation

Jill Stoddard
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A recent article quoted Professor Bob Hodrick on whether or not oil prices were being artificially driven up by the coordinated efforts of an influential group of speculators.

“The market is so competitive that that's nonsense,” Hodrick was quoted as saying. “There’s no way for everyone to communicate and get together and say, ‘We’re going to buy and drive the price up.’”

The article, from U.S. News & World Report, reports on how speculators play an important role in the oil markets and the global economy.


by Osifo Akhuemonkhan | July 03, 2008 at 10:22 AM

In the last quarter oil prices were up 37.8%. That type of sharp rise cannot be attributed solely to the forces of supply and demand nor to the weak dollar or a combination of the two. The group of people who are now referred to as "Speculators" according to the US News article now include, in addition to futures traders, hedge fund and pension fund managers. That's just way too many types of investors and traders betting on a commodity as widely used as oil. There isn't a concerted effort by speculators to raise the price of oil BUT their individual efforts to compete effectively with each other is causing the same consequences as would a collective, concerted effort. Consider this, if today the price of oil is trading at $144.00 and there's a rumor (just a rumor not a confirmed fact) that Israel is going to attack Iran or say there is some heated rhetoric between both countries, neither supply nor demand changes dramatically, but the futures traders act on those rumors by buying more futures- artificially raising the demand hence causing the price to go up. Lets say their actions drive the price of oil to $155. Now if it turns out that those rumors are false or that the heated rhetoric is just that, the price of oil doesn't go back to $144, it drops from $155 but it never goes back to $144. Those increases add up. Thats one of the ways speculators are adding to the problem. I think it has reached ridiculous levels where any rumor, comment by the CEO of an oil company (in this case Gazprom), hearsay or tough talk from political pundits and analysts cause oil prices to rise. Yes some part of the increase in oil prices have something to do with rise in demand or lack of supply, but a portion of that rise in demand is artificial and is caused by speculators. We need to lower or eliminate that portion. I'm not a big fan of strict government regulations on markets, but i think it's time to pay closer attention to what's going on in these energy futures markets.

by Mark Trayling | July 03, 2008 at 3:01 PM

The market for oil at the moment though, in terms of classical demand and supply analysis, would appear to be broken. Oil prices are 5 times more than they were 7 years ago. Much of the blame has been placed on demand from India and China, however, according to the Indian Petroleum Minister at the World Petroleum Conference, the two countries only account for ONE EIGHTH of the world's consumption. Food for thought.

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