Oil Prices Double, Futures Contracts Flat & Falling: Where's the Excessive Speculation?

by: Mark J. Perry

From the Wall Street Journal:

Lawmakers eager to curb speculation in oil markets got support Monday from witnesses who told a House subcommittee that oil prices could fall sharply if Congress put strict limits on trading in energy futures by investment banks, pension funds and other financial investors.

Lawmakers in both the House and Senate are aggressively exploring ways to rein in what they believe is excessive speculation driving skyrocketing oil prices.

"Speculators" in the oil futures market have become a prime target on Capitol Hill, as lawmakers look to respond to voter anxiety about soaring motor fuel prices. A hearing Monday before the House Energy and Commerce subcommittee on Oversight and Investigations highlighted fundamental disputes over the role of financial investors in the recent spike in oil prices.

The chart above provides evidence suggesting that speculators and futures trading may have played almost no role in the recent oil spikes. Since January 2007, oil prices have more than doubled from about $58 to $138 per barrel, a 138% increase. During that same time period, the open interest for futures contracts has remainded relatively stable at an average of about 333,000 contracts (see chart). Further, notice during the recent 55% surge in oil prices since last November ($88.60 to $137), open interest has been falling, not rising!

Where's the "excessive: speculation? The data suggest otherwise.