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Discord over impact of oil speculation

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Discord over impact of oil speculation

By David Pilling and Chris Giles in Osaka

Published: June 16 2008 03:00 | Last updated: June 16 2008 03:00

Finance ministers from the world’s biggest economies disagreed about the impact of speculation on oil prices at the weekend, with Hank Paulson, US Treasury secretary, warning that it would be a mistake to reach for “some short-term fix”.

Under pressure from some ministers, including Italy’s Giulio Tremonti, the Group of Eight agreed to commission a study from the International Monetary Fund to look into the impact that speculation might be having on the price of already tight supplies of oil.

But Mr Paulson implied that the search for scapegoats was likely to prove fruitless. “Financial investors don’t create trends,” he said, adding the fundamental problem was that inventories were “very tight and there’s concern they will get tighter”.

He added: “People want to look for short-term solutions. But the danger of people saying that this is all speculators is that we won’t do what we need to do.”

Mr Tremonti had said earlier: “My judgment is that the phenomena of demand and supply can cause price rises, but not so violent and sudden. This leads one to think that the causes are not structural, but that on top of the barrel [of oil] there is a magnum of speculative champagne.”

Dominique Strauss-Kahn, IMF managing director, said: “Some of the members of the G8 were of the opinion that there may be financial factors, let’s call it speculation, while some say probably not. For that reason they have asked the IMF to provide a report.”

Fukushiro Nukaga, the Japanese finance minister who chaired the meeting, said although the fundamental balance of supply and demand was the main reason for high prices, “financial factors may also play a role – we don’t know yet”. France was also said to be keen on an investigation into the role of speculators.

Alistair Darling, UK chancellor, was closer to the US position, saying the solution was to push for more supply and increase energy efficiency.

“It would be a pity to let people get off the hook by waiting for a report which might not take us much further,” he said.

“Whilst there is clearly some speculation, it is difficult to distinguish between an airline sensibly hedging its fuel prices and someone gambling in the markets.”

A UK Treasury discussion paper released on Friday concluded: “Investment activity in the financial markets is not driving prices, although in following them it could . . . be having a small and transitory impact.”

It added: “It is more likely that wider uncertainty about fundamentals in the commodities market and tight supply conditions are driving price levels and volatility in the market.”

Mr Paulson also said high oil prices – which he warned could prolong the US downturn – should not be tackled by subsidies.

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