The genie is out of the bottle but apparently powerless to answer any wishes. The US Commodity Futures Trading Commission (CFTC) has finally issued its proposals for new rules that "would limit big traders' speculative positions in energy futures", a desire of many governments and market participants since speculation was blamed for the surges in energy and food prices in 2008.

In the years since 2004 and right up to July 2008, oil prices have been volatile, but persistently on the rise without much support from the fundamentals of supply and demand. The average price in 2004 of the Opec basket was $36.05 a barrel and increased to well over $140 in July 2008 before it crashed to around $38 by the end of that year.

It is true that the period witnessed substantial growth in demand especially from developing countries and more so from China and India, but this increase has been amply met by increasing supplies from producers around the world and Opec producers in particular to the extent that world inventories continued rising or stayed at very comfortable levels. Yet the activities in the futures market continued to drive oil prices to unprecedented levels.

When oil futures became part of the New York Mercantile Exchange (Nymex) in the mid 1980s, the Exchange selected West Texas Intermediate (WTI) as the crude to be traded which made it a substantial marker later on to price a lot of oils around the world. At that time WTI production was about 1.5 million barrels per day (mbd) and the traded volume reached 10 mbd which was thought to be adequately proportional to world demand of almost 60 mbd.


Nowadays, WTI production has declined to about 0.3 mbd and world demand only increased to 83 mbd, yet the traded volume on Nymex has increased to 100 mbd in 2003 and 600 mbd in 2008 or from a fraction of world demand to many folds of the same.

Therefore, there is no denying that such level of futures market activity must have contributed to the volatility and upward pressure on oil prices except from those who are making billions out of this situation to the detriment of consumers and producers alike.

We are told that the weakness in the dollar exchange rate and the decline in the stock market have driven investors to the commodities market and especially oil where they can make more money by building the bubble to about $150 before it burst with a bang as speculators went out of the market in time to come back to it later.

The complaints of Opec ministers over the years went largely answered by demands to increase production by IEA and consumer governments against the fundamentals of the market until the financial and economic crises gripped the world in the middle of 2008.

Opposition remains

Many voices were then raised calling for regulation to limit speculation, from lawmakers to governments to many researchers and concerned citizens. There are, however, many banks and market participants who still oppose any further regulation on the ground that rising oil prices were only a product of rising demand, reduced Opec production and the fear created by the ‘peak oil' theory. But, even if we admit this, how can we explain the precipitous fall of more than $100 inside only a few months?

There will be much debate about the CFTC proposals, especially that they are not fully understood yet. But as we say in Arabic "a torrent usually starts with few drops" and until then and probably after, the casino will continue in the service of the banks and large trading houses.


- The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.