Soros Says Record Oil Prices Result of `Bubble' (Update3)
By Matthew Leising
June 3 (Bloomberg) -- Billionaire investor George Soros said the record oil prices weighing on the economy are the result of a ``bubble'' caused by speculation from index funds and a tight balance between supply and demand.
``The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,'' Soros said in testimony before the Senate Committee on Commerce, Science and Transportation. ``The rise in oil prices aggravates the prospects for a recession.''
The committee is holding hearings on potential energy price manipulation. Congressional leaders are pushing the Commodity Futures Trading Commission and other agencies to step up efforts at overseeing the markets for fuels such as gasoline as retail prices are forcing consumers to drive less. The hearings come as oil has retreated from a record $135.09 a barrel on May 22.
The average nationwide pump price for regular gasoline rose to a record $3.978 a gallon yesterday, AAA said. The price was above $4 in 12 states and the District of Columbia.
Gasoline demand in America fell 4.7 percent last week, which included Memorial Day weekend, from a year earlier, according to MasterCard Inc.'s SpendingPulse report. Sales have declined in 16 of the past 19 reports.
Soros laid some of the blame on recent oil price rises on commodity index funds, which only buy oil contracts, helping to push prices higher.
``Commodity indexes are not a legitimate asset class,'' he said. He added that raising margin requirements would not affect index trading but could function to limit speculation.
Soros attracted renewed controversy with his 10th book warning that an exploding ``superbubble'' threatens the global financial system, the New York Times reported on April 11. The book bases its conclusions on the idea that individual inclinations and actions generate market fluctuations, rather than the conventional view that markets move toward some kind of equilibrium, the newspaper said.
The current oil market price ``is a textbook illustration of my theory'' on bubbles, Soros said in an interview after his testimony today. ``The buying is based on a misconception'' as well as a fundamental driver of higher prices, he said.
Soros said he does not consider himself an expert in oil markets and is not investing in them now. ``I stay away from the oil market because it is a very tricky market.'' He added ``I don't find it an attractive market.''
The Senate committee also heard testimony from a consumer advocate who said U.S. regulators are failing Americans by not properly regulating energy markets.
Minnesota Senator Amy Klobuchar said the U.S. spends $600,000 per minute on foreign oil. ``I want to follow the money and figure out how American consumers are getting ripped off,'' she said. ``We need a cop on the beat. We also need a prosecutor on the beat.''
Mark Cooper, director of research for the Consumer Federation of America, said the current commissioners of the CFTC and Federal Energy Regulatory Commission are to blame for allowing energy prices to rise to records.
``Just fire the commissioners and clean the problem up,'' Cooper told the committee. He compared the federal regulators' reaction to recent price spikes to ``the regulatory equivalent of the FEMA's response to Hurricane Katrina,'' referring to the Federal Emergency Management Agency.
``Americans are suffering needlessly due to the financial bubble'' in energy prices, he said.
Soros disagreed with Cooper's analysis that $40 of the current oil price is related to the cost to get it out of the ground, $40 is added by the ``OPEC cartel,'' and $40 is due to speculators in the market.
``I think that is an exaggeration,'' Soros said. ``There are serious underlying factors for the rise of oil.''
Soros said too much regulation of oil markets could drive trading into unregulated areas such as the over-the-counter market.
Oil has gained 91 percent in a year. The CFTC said last week it's been investigating the transportation, storage and trading of U.S. crude since December. The commission took the unusual step of announcing an on-going investigation due to ``unprecedented market conditions,'' it said May 29.
The agency said today that it will tighten rules for investors and index funds, including increased disclosure about holdings in agricultural markets, after farmers and lawmakers alleged speculators had inflated food prices. It also said it's investigating possible manipulation of the cotton market.
Senator Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee, said last week that acting CFTC Chairman Walter Lukken may have used incomplete data in discounting speculators' impact on soaring oil prices.
Speculators are not driving oil prices higher, according to energy exchange executives.
``We don't see that from our data, but I think it's important the CFTC assure everyone about what's driving prices,'' Nymex Chief Executive James Newsome said in a May 30 interview. ``Our data indicate the prices are moving by fundamentals.''
Intercontinental Exchange's Chief Executive Officer Jeff Sprecher agreed. ``In fact, it looks like the amount of speculators in energy markets has been decreasing as a percentage. What's been increasing is hedgers,'' he said in an interview the same day.
``We've seen this rapid influx of commercial users,'' Sprecher said. ``That's why we want to get data in the hands of regulators so they can provide assurance it's not speculators'' causing prices to rise.
A U.S. probe into whether speculators manipulated oil prices up to more than $135 a barrel is a ``waste of time,'' billionaire hedge-fund manager Boone Pickens said yesterday.
``What you're trying to do is trying to find a scapegoat and place blame for it when what you have is demand that is greater than supply,'' Pickens said in an interview. ``We're using 400,000 barrels of oil less today than we did a year ago, but the Chinese are now using 500,000 barrels greater than they did last year.''
Pickens himself was criticized for his comments on the investigation.
``To say that investigation and, by implication, regulation, are useless is an indication that what he wants is a Wild West, not an orderly market that has some reaction to supply and demand,'' Judy Dugan, research director of Consumer Watchdog, a nonprofit based in Santa Monica, California, said in a telephone interview.
Record oil prices are hurting industries such as airlines. Higher fuel prices may push some carriers into bankruptcy by next year, Soleil Securities Corp. said in a note to clients on May 21.
AMR Corp., parent of American Airlines, and UAL Corp., owner of United Airlines, are more likely to be forced into Chapter 11 in 2009 if fuel prices don't fall to ``sustained lower levels,'' analyst James M. Higgins said in the report.
To contact the reporter on this story: Matthew Leising in New York at email@example.com.
Last Updated: June 3, 2008 14:49 EDT
Soros comments on markets when he has a position in them.
No no no......its not speculators, its supply and demand coupled with lack of refinery capacity.
Doesn't he know anything?
I got to "Soros" and quit reading. I'm not going to waste my time
...And T. Boone Pickens and Goldman Sachs don't?
Ahmadinejad -market full of oil, prices artificial
Tue 3 Jun 2008, 10:39 GMT
ROME, June 3 (Reuters) - The global market is "full of oil" and rising crude prices are being driven by forces trying to further geopolitical aims, Iranian President Mahmoud Ahmadinejad said on Tuesday.
"While the growth of consumption is lower that that of production and the market is full of oil, prices continue to rise and this situation is completely manipulated," Ahmadinejad said in his address to a U.N. food summit in Rome. (Reporting by Robin Pomeroy)
Damn -- Just when I was sure that I could never agree with Ahmadinejad on anything. I agree with the nutjob on this!
Soros is the cause of the bubble.
He's probably got a nice fat short position now. Notice he didn't say anything when they got crazy at $100. and probably was riding long then.
He has made his money, time to pop the bubble and make some more.
When even the evil people admit it is a bullshit bubble, THEY HAVE MADE THEIR PROFIT and are going to bail out.
Oh, and when the Ultra-left realizes that consumers HAVE cut back and prices will bomb out BEFORE election time, they will pipe up like this and claim that "THEY KNEW IT WAS A BUBBLE TOO!!!"
He's dead wrong about the Second Amendment, dead wrong about what constitutes a free people living in a free society, dead wrong about the legacy and trajectory of western civilization, but RIGHT about an even MORE complicated subject; the condition of the world's available oil supply and production/delivery infrastructure......I DON'T THINK SO!