Hundreds of billions of dollars of personal profits for speculators seems like a reasonable, arguably conservative, estimate. To arrive at this figure you need to make some assumptions and do some calculations.

First, we have to determine the amount of speculative money that is trading oil. The amount of money hedge funds manage is conservatively estimated to be $1.2 trillion according to the Economist, half of which is dedicated to strategies that cannot invest in oil. In 2004 hedged funds controlled $1.0 trillion. So in 2004 we can assume that $500 billion in hedge fund money could trade oil. Barclays PLC estimated that money dedicated to commodity investing totaled $80 billion at the end of 2005 and was probably around $60 billion in 2004. Managed Futures magazine estimated that managed futures (money managed by Commodity Trading Advisors (CTA’s)) amounted to $130 billion in 2004.

If we add these pools of money up we come up with a total of $690 billion in 2004 ($500B Hedge Funds, $60B Commodity Funds, $130B managed futures). No doubt there may be some overlap and there may be some double counting between managed futures and commodity funds. However, there are lots of pools of money and money managed by proprietary traders and trading desks of financial institutions, by the trading desks of oil companies, and others that is not included in that figure. So the $690 billion is probably a fair indication of the pool of speculative money that would have traded energy products.

Since 2004 the price of oil has doubled. If all the speculative money that could have invested in oil ($690B) had invested all of its capital (un-leveraged) in oil they would have doubled their money, or profited by $690 billion.

Many would say no one would bet all their capital on oil. Such thinking would be wrong. Hedge Funds, Commodity Funds and other speculative investment vehicles leverage their portfolios. Since they only have to put down a small amount of margin ($’s) when they buy or sell futures, a fraction of the total amount they control, this means that they can leverage themselves from anywhere to 5 to 20 times the amount of money they manage. For example, one would have to put up less than $10,000 to control $100,000 in oil. Speculators have also been known to engage in renegade (illegal) operations to circumvent margin rules by borrowing from banks such as Long Term Capital Management (LTCM) did and leveraged itself up over 100 times its speculative pool of capital.

Compounding the difficulty in calculating speculative profits is the plethora of investment opportunities for speculators in the energy complex. Speculators can trade in oil, heating oil, gas natural gas, propane on exchanges or can tailor make derivatives. Many of these commodities move in lock-step and influence each other, so the profits for speculators trading in the energy complex overall is much higher. There are also transactions costs, rollover costs and the entry and exit of trades that can all influence returns.

On April 26, 2006 Energy products represented 74.38% of the Goldman Sachs Commodity Index (GSCI). Crude Oil represented 31.07% and Brent Crude Oil represented 14.83% of the index. So oil represented 45.9% of the GSCI index. Assuming that $690 billion was not leveraged and proportionately invested in commodities on a dollar for dollar basis it would amount to $310 billion (45.9% of $690B) allocated to oil. Since oil doubled since 2004 this would represent a profit of $310 billion.

Of course we are making gross assumptions and ignoring a lot of other things. It also must be remembered that we are looking at the global market and not just the USA market. But it does give a glimpse of the enormous profit potential for speculative funds. In conclusion, it is very reasonable to assume that speculators have made hundreds of billions of dollars from manipulating oil prices higher. This does not include the multiplier effect of punters shenanigans of pushing oil higher--WINDFALL PROFITS FOR OIL/GAS/EXPLORATION COMPANIES, WINDFALL PROFITS FOR OPEC OIL PRODUCING COUNTRIES, ETC.

Back to Article