Yesterday, Congressman Joe Donnelly attended a House Agriculture Committee hearing in which he questioned Acting Chairman of the Commodity Futures Trading Commission (CFTC) Walter Lukken about the role of speculation in driving up the price of a barrel of oil.
"I asked tough questions of Chairman Lukken about speculation's role in driving up the price of oil," Donnelly said. "I was looking for answers as to why hard working Hoosiers are suffering more and more at the pump while speculators on Wall Street are artificially driving up the price of a barrel of oil."
Speculators, by definition, do not produce or use a commodity, but risk their own capital trading futures in that commodity in hopes of making a profit on price changes. As a result, the price of commodities, such as oil, is often not determined solely by supply and demand, but also by abusive or manipulative practices by these speculators. Part of the CFTC's role is to prevent these types of abusive practices through regulation.
During the hearing, Chairman Lukken agreed with Donnelly that his commission's ongoing investigation into abusive speculation practices, which was initiated in December 2007, is necessary and important. He also agreed that speculation has become more widespread in recent years.
According to an analysis of CFTC data by the House Subcommittee on Oversight and Investigations, speculators have increased their share of oil futures contracts on the New York Mercantile Exchange, the world's largest physical commodity futures exchange, to 71 percent this year, up from 37 percent in 2000. Over the same time period, contracts held by traditional oil users have fallen to less than 30 percent from more than 60 percent.
Despite Chairman Lukken's admission that speculation has become more prevalent, he was unwilling to acknowledge that speculation is adding to the cost of a barrel of oil. In response, Donnelly stressed that factors beyond supply and demand are also impacting the price of oil.
Several experts agree that speculation is playing a role in the rising price of oil, including Michael Greenberger, a former Director of the Division of Trading and Markets at the CFTC, who stated in prior congressional testimony that better oversight of trades by speculators could reduce the price of a barrel of oil by as much as $30.