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From Mr Dennis Kelleher and Mr David Frenk.

Sir, Sylvia Pfeifer’s article “Rising oil price threatens fragile recovery” (January 4) was quite right to point out that the accelerating rise in oil prices poses a major threat to a US and global recovery. However, the article only told part of the story.

Is the current oil price rise really attributable to emerging market demand – especially from China – as some commentators claim? China’s economic growth is slowing, with expected growth for 2011 downgraded from 10.5to 8.5 per cent. Moreover, data from the US Energy Information Administration show that the global supply and demand balance for crude oil is much the same as it has been for the past 20 years. Granted, demand for oil has risen, but so too has supply. The latest EIA figures suggest there is no persistent shortage of oil.

So what can explain the rise? Perhaps part of the answer might lie in the $50bn of institutional money Barclays is estimating will flow into commodity indexes this year (on top of the already record high $350bn or more presently “invested”). The best available data suggest that close to half of this money is held in the form of long crude oil positions. Estimates of the impact of this money on crude prices range from a premium of 15 per cent on the conservative side to as high as 50 per cent.

Furthermore, net long speculative positions in crude oil by hedge funds and other large financial speculators are reported to be at a record high, having increased by close to 5 per cent during the last trading week of 2010.

Some have argued that speculation cannot drive up futures prices over the long run, because, ultimately, betting against supply and demand fundamentals is a losing strategy. Yet, when speculators control more than 50 per cent of the market, as they do in many commodities today, it is the producers and consumers who lose out to the speculators, not the other way around.

The International Energy Agency suggests that 0.5 per cent of gross domestic product in the Organisation for Economic Co-operation and Development area will be lost because of the current price hikes. However, their baseline is the already inflated prices of 2010. The true cost of excessive speculation in oil and other commodities is therefore much higher. Stamping down on oil speculation, particularly index speculation by large institutional investors, is a targeted, high-impact stimulus governments around the world can no longer afford to ignore.

Original Article