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Congress held hearings Monday on the role that speculators play in shaping the oil market — specifically, the role they play in driving prices up.
Like most commodities, oil can be purchased and sold not simply for immediate delivery, but for receipt at some point in the future. The issue of the day rests in this “futures” market.
Normally, most of the players in the futures markets are industry players — largely shippers and refiners — who simply are planning ahead. After all, why purchase crude oil at the last second and risk that none will be available when one can purchase a futures contract that will ensure delivery in, say, September? If August rolls around and it turns out you do not need all the crude you in effect pre-purchased, one can simply sell the extra futures contract and buy a new contract for October delivery. In essence, it’s the industrial equivalent of keeping a spare can of gasoline in your garage.
But there are other players in the futures markets, too: investors who have no intention of ever taking delivery of any shipment. Instead, they play the market in a bid to profit from price fluctuations. Such speculators used to be marginal players, but right now there are a lot of these folks. Some estimates put them at more than two-thirds of total traders by volume. Part of this jump is thanks to the subprime lending mess. When the mortgage market cracked in late 2007, many who made their living trading mortgage securities and property fled into the energy markets.
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