Belief in conspiracies is nothing new. To this day many continue to assume that President John. F. Kennedy’s assassination was the result of a conspiracy. The 1914 murder of the heir to the Austrian throne led to the First World War as it was inferred to be part of a nationalistic plot. President George W. Bush argued that the 9/11 attack on the United States was triggered by an Iraqi plot.
It should come as no surprise, then, that there is a widespread conviction that the price of oil is based on large-scale manipulation. In this case, the suspicion has been confirmed by CBS’ 60 Minutes, which revealed startling facts about the machinations that determined the oil price. CBS noted, "In a year’s time a commodity that was traditionally priced according to supply and demand, doubled to nearly $150 a barrel and then crashed along with other commodities and the stock market. So what happened? Well, it turns out the price of oil may have as much to do with traders and speculators on Wall Street as oil company executives and the sheiks of Saudi Arabia."
The price volatility of oil is truly amazing. The price spikes and subsequent falls have been unprecedented.
It is essential to note the way oil is traded. For years, it was bought and sold on the New York Mercantile Market, along with cotton, wool, coffee, agricultural products and steel. The purpose of that exchange is to let farmers assess what their unharvested crops would be worth at the end of the season. Also, that market permitted factories to secure the price of raw materials; and airlines, too, then could manage their fuel costs.
One would have had to presume that the market is an honest one. Yet, according to Dan Gilligan, president of the Petroleum Marketers Association (which represents more than 8,000 retail and wholesale suppliers), last summer the oil market started to behave in an exceptional way; the commodities market apparently was overwhelmed by a new breed of "investors." On account of their activities, nearly three-quarters of the oil contracts in the commodity futures market were now held by speculators, not oil companies themselves or even ultimate buyers such as airlines. It was the speculative traders who held those positions, hoping to make money out of their contract holdings.
Those traders do not actually ever take delivery of the oil, but merely buy the papers, that is the futures contracts. Obviously, they hope to sell them for more than their purchase price, before they take delivery of the oil. Many have noted that prices seemed to bear little relationship to supply and demand. The U.S. Department of Energy’s own statistics showed that if the markets were working properly, in view of the excess of supply, the price of oil should have been going down last year, not up. However, the huge California Pension Fund, Harvard’s endowment fund and numbers of hedge-fund managers, were piling in the futures market, driving up the price of oil. Subsequently, funds in the commodity market ballooned from $13-billion to $300-billion in months. In other words, most of the run up in the price of oil was caused by traders buying futures contracts, and thus bidding up prices.