Petrol's price pushers

Hedge fund manager Michael Masters says the reason behind the wildly fluctuating price of oil is market manipulation by institutional investors.

The price of petroleum has had America over a barrel. First it was soaring, then sinking, and now who knows where it's heading, or why? Over the past year Congress has held more than three dozen hearings on the price of oil. At the latest, this past week, hedge fund manager Michael Masters told a Senate subcommittee that supply and demand can only explain a part of the volatility. Masters says the real reason is market manipulation, not necessarily by a small group of Dr. No evildoers, but by institutional investors, who funneled hundreds of billions of dollars into what are called commodity index funds.

MASTERS: "Crude went up and crude went down. And just coincidentally, it tracked exactly the money going in and the money going out. To really understand supply and demand, you can't just look at supply and demand in the physical market. You have to look at supply and demand of investors' dollars as well."

Institutional investors were buying index funds in commodities and part of that index was petroleum -- and it was pushing the price up and up and up and up.

MASTERS: "The most popular index, which is the Goldman Sachs S & P index, petroleum consist - and petroleum dry products – consist of roughly 70 percent of the index. So in effect, every time they put in a dollar into one of these indexes, three quarters of that dollar roughly went into petroleum products. And thus, you had an increase in the price. And there's a big difference between the capital markets and the commodity futures markets. Commodities represent inventories."

People can buy and sell everything from pork bellies to petroleum -- but they're just inventories.

MASTERS: "Now when you buy a bushel of corn, it doesn't provide any interest. It is a much different animal than a stock or bond. When someone buys a stock or bond, they don't expect to take it home and have it for breakfast. So, the price of a crude oil barrel is determined by the supply and demand in the physical markets and the supply and demand in the commodity futures markets of investor dollars. Collectively, they determine what the price is. Unfortunately, you know, when you have an influx of investors into these markets, you have significant distortions. And the issue that makes them dangerous, if you will, is this whole mentality of "buy and hold." Commodities are meant to be traded. Just buying and holding what you look like in the commodity futures markets is a giant consumer."

In January 2000 the price for a barrel of oil was about $24; in July of this year it was about $147, nearly $150; now it's below $100.

MASTERS: "We noticed a very significant amount of dollars flowing into index funds really starting around 2003. In fact, in 2003 the amount of index investment from large institutional investors in the commodity futures markets was roughly $13 billion. And by July of this year, that figure had grown to $317 billion. And we found that in excess of $60 billion of inflows had happened between January of this year and May of this year. And then, from July 15th of this year to just recently, September 2nd, $39 billion of outflows. And so, the price of crude and the price of petroleum products and indeed all commodities actually correlated very well to the inflows and outflows of these large institutional dollars."

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