Oil investors welcome high prices at pump

Regular gasoline prices vaulted to a once unthinkable record of $3.42 a gallon yesterday, paining most Americans but pleasing a growing contingent of investors who are profiting from the fast-rising price of fuel.

Scott Lee, a small investor from Georgia who owns oil company stock, said it’s the reason he is not bothered by rising pump prices.

“People gripe about $3.30 gas. What about $4 gallon for milk or — even better — a $4 cup of some frothy coffee?” he said. “Gas has done nothing but keep up with the other markets. I just wish I had bought stock in oil companies” a decade ago when oil prices were one-tenth of today’s price of about $115 a barrel.

Economists say robust demand for oil in the developing world and strains in supplies worldwide account for some of oil’s spectacular rise, and pose the possibility of serious supply shortages in the next decade. But they say prices today are well beyond the point where they can be explained by supply and demand alone. A speculative fervor appears to be behind the latest round of price increases.

Oil has strong appeal to large and small investors alike both as a speculative and long-term investment, and as a hedge against inflation and the falling dollar. Oil and other major commodities are priced in dollars and tend to rise as the dollar falls. And the dollar’s decline has been accelerating since a financial crisis sent the United States into an economic slump last fall.

“The flow of liquidity into commodities as an inflation hedge” is a principal reason why prices are rising, said Nariman Behravesh, economist at Global Insight, along with strong growth in demand for fuel in China, Russia, India, the Middle East and other developing countries.

“Oil prices have overshot,” he said, “but they could stay high for some time.”

That comes as especially bad news to Americans, who have been cutting back on purchases of fuel in an attempt to lick high prices. Mr. Behravesh expects oil prices averaging more than $90 this year to continue to hobble consumers and a U.S. economy that already has slipped into a mild recession.

Few forecasters are willing to venture a guess as to how high oil prices will go. But T. Boone Pickens, perhaps the world’s most famous oil speculator, recently predicted the price of premium crude will reach $125.

Analysts say between 10 percent to 50 percent of the price of oil may be due to speculation. “A tidal wave of investment flows” caused a 20 percent jump in holdings of oil, gold and other commodities to $400 billion in the first quarter of the year, said Citigroup analyst Alan Heap.

Investors have been pouring money into index funds that track the rise in commodity prices, which jumped by $40 billion to $185 billion in the first quarter, a larger gain than the whole of 2007. Commodity traders and hedge funds have amassed huge holdings of oil and other commodities of $94 billion and $75 billion respectively, according to Citigroup.

Many small investors have been getting in on the action through exchange-traded funds (ETFs), which are easier to manage and cheaper than mutual funds and enable them to participate in volatile energy futures markets that were designed for large traders such as oil producers and refiners. ETFs accounted for $46 billion in commodity investments as of March 31, up 31 percent from $35 billion at the end of 2007.

Several Web sites cater to the increasing speculation in oil and other commodities, including BetCRIS.com, an online betting site where odds are running 6 to 4 in favor of gas prices reaching $5 a gallon at the pump this year.

“One can’t help but wonder just how far they’ll go, and what kind of impact the high costs will have on daily life around the globe,” said Esteban Siles, a spokesman for the site.

While the “hot money” flowing into oil markets has recently drawn scrutiny from Congress, many people favor oil as a long-term investment. Production of oil is expected to peak worldwide in the next 30 years, but demand keeps marching ahead as more and more people emerge into the middle class and start driving cars in countries like China, India and Russia. That means prices over the long term have nowhere to go but up.

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