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Administration, OPEC See Different Causes Of Oil Surge

Financial speculation and a weak dollar are the prime suspects

By Mark Huffman
ConsumerAffairs.com

June 4, 2008

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What's behind the ever-climbing price of oil? Depends who you ask.

The U.S. Commodities Futures Trading Commission says it is investigating whether speculation among traders in the spot oil market is behind the surge, a notion discounted by a top Bush Administration official.

In the Middle-east last week, Treasury Secretary Henry Paulson rejected that view. He told reporters that the facts show that oil supply and demand is solely responsible for the price of oil going over the $130 a barrel mark last month. Some investors agree, saying market fundamentals are at work.

But that's not how the Organization of Petroleum Exporting Countries sees it.

Chakib Khelil, the president of OPEC, said last week the combination of market speculation and the declining U.S. dollar is the main reason for oil's record rise. That view is also held by a growing number of members of Congress.

Congressional Democrats this week opened discussions on way to limit speculation in the crude oil markets. Sen. Maria Cantwell (D-WA) held out little hope for the CFTC investigation, calling the commission "a toothless tiger." She called on the CFTC to revisit last year's investigation of the West Texas Intermediate Oil Contract on the Dubai Exchange. The commission concluded its probe without taking action.

Other analysts say everyone may be right, at least to some extent. They say market speculators may have taken advantage of growing demand and a declining dollar to place bets on oil going higher.

Joseph Stanislaw, CEO at JAStanislaw Group, told Bloomberg News that speculators are, in fact, playing the commodities market. But he says they are simply following fundamentals in placing their bets, not manipulating the market in one direction or the other.

Oil prices hit $135.09 a barrel on May 22. Government data shows that about that time, hedge-fund managers and speculators, in significant numbers, reduced their bets that oil would go even higher. Oil prices have since fallen almost $10 a barrel.

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