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Veteran Oil Trader: Big-Money Speculation the Main Cause of Oil Price Volatility

March 3, 2011

As the CFTC struggles to gain its footing on the path to regulating oil speculation and hopefully tamping down price volatility and manipulation, the debate over the true cause of volatility continues. Groups led by petroleum retailers like heating oil dealers and businesses that rely heavily on petroleum products like commercial airlines continue to forcefully argue that out-of-control speculation is driving up oil prices. Financial interests like investment banks and commodity markets continue to deny that speculative activity has any hand in inflating or destabilizing oil prices.

A veteran oil trader interviewed by CNBC this week offered his two cents in the debate in no uncertain terms: the new class of speculative investors in oil markets is the main cause of oil prices spikes since 2000. Dan Dicker has traded oil products at the New York Mercantile Exchange for 25 years, and “put investment banks first” on his list of those responsible for rising oil prices during his brief interview with CNBC. Investment banks, with billions of dollars of capital at their disposal, have become major participants in oil trading since the Commodity Futures Modernization Act of 2000 opened up the markets to them and other speculators. According to Dicker, the sheer volume of oil-based investment products purchased by investment banks leads directly to Americans paying more for gasoline and heating oil:

The three largest investment banks trade in oil as well and make a couple of billion dollars each trading oil a year, which directly comes out of the pockets of consumers.

Second on his blame list are individual investors in oil markets, who participate through index funds and commodity based exchange-traded funds (ETFs). Collectively, these speculative investors have the same effect on the oil market as investment banks—their combined investment wealth is theoretically large enough to move the prices of commodities like crude oil and heating oil. And because nearly all of these investment funds are buying up futures contracts and futures-derived products, essentially betting on higher prices, they nearly always move prices higher. As Dicker explained, “These new participants are exclusively buying; no one is selling and everyone wants to hold.”

It is worth noting that Dicker never uses the words “speculation” or “speculator” in his interview, though any commodity investor not interested in possessing the physical product they are buying or selling is technically a speculator. His omission of those terms likely speaks to his long-time profession: whatever its effects on prices, speculation is a big part of commodities trading, and condemning it in broad strokes could hurt a traders’ standing within his industry.

Whatever the trading activity is called, Dicker’s stance is clear: speculation on oil by investment banks, index funds, and ETFs are primarily responsible for the last decade’s volatile and steeply rising oil prices that have claimed increasingly large slices of the average American household’s budget.

It may not be the “smoking gun” that commodity speculation reform advocates are looking for, but the opinion of an oil trader with more than two decades of experience should be given considerable weight in the debate over whether and how much to regulate oil speculation.

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