The Treasury Select Committee will tomorrow examine the role of speculators in driving oil prices to record levels.
Deputy chair of the influential committee Michael Fallon said: “We need to understand how much speculation is influencing that international market and what, if anything, governments can do about it.”
Brent crude hit a new all-time high of $147.25 last Friday in London. The price of oil has risen 50 per cent since the start of the year.
Head of the committee John McFall added: “There is a real problem here. We really need to take some action because it’s reported there is $260bn
of speculative money in the oil futures market.”
Critics of hedge funds and other speculators say that up to 60 per cent of the rise in oil is due to speculation. The biggest oil producing countries, including Saudi Arabia, have also blamed speculation for the current rally.
America’s Congress is considering ten different bills to limit speculative activity, including the End Oil Speculation Act of 2008 and the Federal Price Gouging Prevention Act.
The Treasury Committee will hear evidence from a range of sources on Tuesday including Royal Dutch Shell, City watchdog the Financial Services Authority and Sir Bob Reid, the chairman of ICE Europe – which is the former International Petroleum Exchange.
Critics of speculators say they should pay more of their forward contracts for oil upfront to discourage speculation, instead of the nominal amounts they currently pay. Fallon said: “We will be exploring measures such as this to see if they have any weight.”
However, supporters of the current system say speculation is a small part of oil the recent price increases. They add that speculators help large oil consumers, like airlines, hedge against rising prices, and so reduce risk.
Some observers also add that in the current system speculators provide oil producers, from giants like BP to small Aim-listed explorers, with more predictable sales revenues, which in turn allow them to borrow cheaply.
City Views: Are speculators to blame for price hikes?
Tony Shepard (Charles Stanley): Speculation may have accelerated the upward move, but the fundamentals have really driven oil prices up. Supply is disappointed and demand is still fairly robust, so it looks as if the fundamentals will maintain a high oil price. Speculation is not the driving factor.
Ivor Pether (Royal London Asset Management): I don’t think speculation is the driving force. Key drivers have been shortfalls in production and strong development in emerging markets. People are looking for scapegoats, but the solution is more difficult.
Justin Uruqhart Stewart (Seven Investiment Management): Shortage of availability is the underlying issue. There is only a limited amount of oil available – it comes down to the laws of supply and demand. There’s a huge amount of speculation, but that isn’t what is driving prices up.