This morning, legendary investor George Soros appeared before the U.S. Senate Committee on Commerce, Science & Transportation, which held a hearing to examine energy market manipulation and federal enforcement regimes. From the Committee’s website:

The hearing will also consider the current state of the oil and gas markets and their impact on consumers, as well as solicit testimony and discussion as to the key factors the Federal Trade Commission should incorporate into its upcoming rulemaking on its new responsibility to prevent manipulation in the wholesale oil and petroleum distillate markets.

Soros told lawmakers Tuesday:

We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble.

However, while the billionaire hedge fund manager warned of bubble conditions, he added:

To be sure a crash in oil markets is not imminent.

Soros explained that oil prices have “a strong foundation in reality.”

For the Hungarian-born investor, commodity index trading is the culprit that is inflating the crude oil “bubble.” Reuters’ Chris Baltimore wrote:

Soros said there was “a strong prima facie case against institutional investors pursuing a commodity index buying strategy,” which is “intellectually unsound, potentially destabilizing and distinctly harmful in its economic consequences.”

Raising margin requirements would have no effect on commodity index buying because they use cash to finance their trading, Soros said. But raising margins “would be justified because it would discourage speculation,” he said.

Sources

“Energy Market Manipulation and Federal Enforcement Regimes”
U.S. Senate Committee on Commerce, Science & Transportation, June 3, 2008

“Oil price crash not imminent despite bubble: Soros”
Chris Baltimore
Reuters, June 3, 2008

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