High Oil Prices Could Mean Recession
High oil prices are driving the U.S. economy into a recession, George Soros, the famous fund manager and commodities investor, told members of the Senate Commerce Committee in testimony Tuesday.
The committee received testimony from a former Commodity Futures Trading Commission (CFTC) official, a consumer rights activist, Soros and others in an attempt to find out if oil prices are being manipulated by speculators.
“The rise in oil prices aggravates the prospects for a recession,” Soros told the committee. “Only when a recession is well and truly in place is a decline in consumption likely to outweigh the factors.”
Soros said the potential for “distinctly harmful effects” of a further increase in oil prices makes speculation “intellectually unsound” and “potentially destabilizing.”
Recent investor interest in commodities is an issue of intense debate. Some analysts believe that commodities investors have boosted the price of crude with speculative trading, treating oil as a hedge against inflation due to the weakened dollar. The witnesses agreed that speculation has artificially boosted the price of oil.
“We’re paying, some believe, as high as a 50% premium to the pockets of speculators that are operating in markets that are completely unpoliced,” said Michael Greenburger, a University of Maryland professor and former CFTC official.
Mark Cooper, director of research at consumer rights organization Consumer Federation of America, said $40 of oil’s price is “baloney” and can be chalked up to speculation.
But others say market fundamentals are playing a large role in the doubling of oil prices in a one-year span, driven by strong global demand and a shrinking supply. Oil companies’ role in the escalating price of crude has also come under intense scrutiny lately. Some analysts have accused Big Oil of failing to invest enough of their profits into exploration and drilling.
Last Thursday, the CFTC announced it had launched a wide-ranging probe into oil price manipulation six months ago, saying it would get more information on the effect investors are having on the market. The commission’s public acknowledgment of a normally secret probe has sparked talk that it has evidence oil companies are withholding oil from the market in an attempt to manipulate prices.
Regarding speculators, CFTC has previously said that it had not found any evidence that traders were artificially inflating prices. On the day the CFTC announced its investigation, crude oil futures dropped $4.41 - the third-biggest one-day slide since 1991 - and prices have hovered around that $127-a-barrel level since.
Tags: CFTC, commodities, George Soros, oil, Senate probe, speculators