What we are left with is the possibility that out of the $70 price for a barrel of oil about $20 can be accounted for by speculation. This brings us to the most important part of the report: We need to know more.
Until quite recently trading on futures markets was regulated by the CFTC. Trades on regulated markets are subject to reporting requirements. Traders are required to report large trades to the CFTC, which has the responsibility of limiting excessive speculation. However, concurrent with the dramatic increase in speculative trading of energy futures, there has been a shift of this trading to unregulated commodity exchanges.
Essentially this shift is the result of an exemption written into the Commodity Futures Modernization Act of 2000 at the behest of Enron. Perhaps more important is the announcement by the Intercontinental Exchange that it would permit traders to use its terminals in the United States to trade futures contracts for crude oil, gasoline, and heating oil produced and delivered in the U.S. on its ICE Futures exchange in London.
In effect, American traders can completely circumvent all U.S. regulation, including reporting requirements, by simply routing their transactions through London. It is important to understand that the CFTC’s large trader reporting requirement is the Commission’s primary tool for preventing market manipulation. The recent charges against BP for manipulation of the propane market appears to involve activity on the over-the-counter-market. Apparently it was part of BP’s strategy to use the unregulated market, where it could avoid making reports and could expect no surveillance.
Not sure how accurate it is to say that speculation is to blame. It looks like a trailing indicator, if the price before speculation went from $20 to $50. Good old-fashioned gouging is still a possibility, of course.
This chart shows the nominal and adjusted prices of a barrel of crude from 1865 onward. A history of OPEC and their control of the market since the early 70s might shed some light on why the prices get so wild after 1975.