Oct. 6 (Bloomberg) -- At more than $50 a barrel, the price of oil has everybody spooked. Economists are worried about global growth. Industrialists are concerned about the cost of raw materials. Car owners are anxious about filling up the tank.

Who's to blame for that? To listen to a parade of politicians in the past few weeks, it's the fault of financial speculators.

That's a bad rap. While there has been speculation in oil markets, that isn't what has been pushing up prices. The cost of oil is near record levels because of rising demand, tight supply, instability in many of the main oil-producing countries and a lack of refinery capacity.

Indeed, some of those reading the ``it's all the fault of speculators'' script could look closer to home -- since an attack on speculators is a sure sign of a politician shifting the blame to someone else for a problem they could be fixing themselves.

Financial traders may well be exploiting a trend. That doesn't mean they created it.

After the meeting of finance ministers and central bankers from the Group of Seven industrial nations last weekend in Washington, U.S. Treasury Secretary John Snow said the world needed more supplies to ``help deal with some market uncertainty, which I think is feeding some speculation.'' He added that spot prices were ``out of line'' with market fundamentals.

Snow isn't alone in holding that view. ``It's not a problem of shortage in the markets,'' said Loyola de Palacio, the European Union energy commissioner, last month. ``It's a problem related to speculation and paper operations, fueled by political circumstances.''

Germany's Clement

Wolfgang Clement, the German economics and labor minister, went further in his remarks at the end of last month. ``On the international level, we have to take action against speculation,'' he told reporters at a trade fair in Berlin. ``We need more transparency so that we can drive away speculators.''

Will any of that translate into action? Well, the G-7 said on the weekend it would ask the International Energy Agency to improve ``oil data transparency'' so it can get a better idea of whether oil-price fluctuations are the result of changes to supply and demand, or just speculation.

So, if you are at a hedge fund trading oil derivatives, is it time to change your name, grow a beard and get out of town? Are you about to be lynched for destroying the global economy?

Not quite. Anyone who looks at the evidence calmly will see that it's hard to pin the blame for the soaring oil price on speculators.

No one would dispute there has been increased oil trading in the market, particularly by hedge funds.

OPEC Estimates

The Basel, Switzerland-based Bank for International Settlements said last month that hedge funds, investment banks and other traders ``sharply increased'' their oil bets this year.

The Organization of Petroleum Exporting Countries recently estimated that as much as $15 of the oil price is the result of speculation.

At the same time, market participants are clearly doing well. Boone Pickens, the retired corporate raider, now says he's made more money from trading oil through his hedge fund, BP Capital Energy Commodity Fund, than he ever did from buying and selling companies.

Global Advisors LP, a London-based hedge fund that invests in oil and metals, said last month it had made gains of 24 percent this year, and that ``massive inflows of capital'' were going into commodities.

So, plenty of funds are furiously trading oil. And some of them are making a lot of money out of it. Yet that doesn't mean they are causing the price to surge -- any more than a surfer is causing a wave to crash against the beach.

Speculators' Acquittal

There are two reasons for dismissing the attacks on speculators.

First, while there is more speculation in oil than there used to be, there is more speculation in everything. We have global, free capital markets, partly created by the same politicians who are now moaning about the price of oil. Instruments such as derivatives have grown in importance, and hedge funds are willing to risk huge sums of capital. So the market is more liquid, and maybe more volatile. That's different from pushing the price up.

Next, there are long-term trends making oil more expensive. Demand is rising fast, Iraq is a mess, Russia's commitment to a free oil industry looks shaky, and OPEC appears to have lost control of oil prices, in both directions. All of those are good reasons for higher prices. And given that $50 a barrel shows little sign of choking demand, expect it to go higher.

Four Recommendations

A recent analysis by Goldman Sachs Group Inc. concluded that speculation isn't a decisive factor in the price surge. ``Speculative positions, while important, probably had a peak impact of less than $7/bbl this past June, which has since shrunk to less than $3/bbl,'' it said.

If world leaders are really worried about oil prices, they should release strategic reserves; promote energy conservation and raise energy taxes; build more nuclear power stations; and lean on Russian President Vladimir Putin to open his country's underdeveloped oil industry further.

Oil prices look ominous to anyone concerned about the global economy. Yet, far more worrying is the first reaction of many political leaders: to curb and control the market, rather than to listen to it.

The market is telling us that expensive oil is here to stay. And that isn't speculation.

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: October 6, 2004 03:30 EDT