ON MAY 20, a neat, grey-suited hedge fund manager walked into room 342 of the imposing Dirksen Senate Office Building in Washington DC and told a US government inquiry why oil prices had risen through the roof.
The culprits, said Michael Masters, were index speculators - large funds who buy oil as a passive investment and whose strategies amount to virtual hoarding.
"If Wall St concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these items unaffordable to sick and dying people, society would be justly outraged," he said.
"Why is there not outrage over the fact that Americans must pay drastically more to feed their families, fuel their cars, and heat their homes?"
Good question, particularly when the New Zealand Super Fund is one of the investors he was talking about.
The Super Fund, which manages about $14.7 billion of taxpayers' money, has deliberately set out to pursue the investment strategy Masters described - constantly buying in the futures market to maintain a passive portfolio exposure.
Its commodity holding is about 5% of the total portfolio and, as of May this year, was worth $738 million.
Masters draws a direct correlation between the amount of money invested by "index speculators" such as NZ Super Fund and the price of commodities.
"Assets allocated to commodity index trading strategies have risen from $US13 billion at the end of 2003 to $US260b as of March 2008 and the price of the 25 commodities that compose these indices have risen by an average of 183% in those five years."
The argument that financial shenanigans are responsible for stratospheric oil (and food) prices is attractive - it implies there really is enough to go around and the high prices will go away once regulators get to grips with the markets. It also complies with basic economics - the sheer weight of money on the buy side will inevitably push up prices - and provides a handy market manipulation theory.
One of the biggest traders in the oil futures market is global investment bank Goldman Sachs.
The company is also the source of a widely used commodity benchmark - the Goldman Sachs Commodity Index, or GSCI.
The NZ Super Fund uses the GSCI as the basis for its commodity exposure - a benchmark that is heavily weighted towards oil. Brent and other crude oils comprise about 57% of the GSCI, while food staples such as wheat and corn comprise about 11%.
In 2005 Goldman analysts shocked the markets with a prediction that oil would reach $US100 a barrel by 2009. Since then Goldman has been among the most bullish of forecasters on oil, in March saying oil could reach $US175 and in May predicting $US200.
The investment bank's role came in for scrutiny at one of the senate inquiries attended by Masters.
After noting Goldman was probably the largest commodity dealer on Wall St, senator Bart Stupak asked a question. "Is there," he said, "an actual or apparent conflict of interest in an investment bank talking up the price of commodities through its research arm while speculating on it at the same time?"
"Absolutely," answered Fadel Gheit, managing director and senior energy analyst of New York investment boutique Oppenheimer. "Unequivocally and absolutely."
Adding to the concern was the difficulty in establishing what any player's positions really are in the futures market, particularly as the use of swap contracts further obscures their identity.
Again, NZ Super Fund is typical of sovereign funds in using swaps for its investment strategy. Rather than trade the futures market directly, the fund engages three global financial institutions to trade the futures market on its behalf, using so-called swap contracts to take gains (or losses) from the futures positions.
The swap means the Super Fund does not pay money to the futures exchange - known as margin - to cover its trading positions and instead can keep the money in its own cash funds.
Swaps also offer exemption from certain speculative trading position limits imposed by the US Commodity Futures Trading Commission, although legislation proposed in the US senate on Wednesday would require index and swap positions to be disclosed.
But while attention focuses on pernicious market activity the big question is still out there - what if the oil price really is driven by fundamentals?
Market sources are reluctant to go on the record but criticism of Masters' views is not hard to find.
"If the oil price was so out of whack with fundamentals," said one, "eventually you're going to have speculators and hedge funds, anybody with the capital and courage, to come in on the other side and sell against it."
"Mike Masters, he's not an expert in commodities," another said. "It's not how he started off. He could be very well right but I'd take what he says with a grain of salt."
While index funds may have contributed to some of the early price rises, he said, "it certainly doesn't account for the latest rise."
According to Goldman Sachs itself, net speculative long positions (ie, index speculators) have risen from 195 million barrels in 2004 to 206 million this year, while oil prices have risen from $US40 to $US140 a barrel.
"Thus," says a Goldman report issued on June 29, "since the last time speculators faced such intense scrutiny, the increase in speculative positions explains almost none of the rise in [West Texas Intermediate] crude oil prices."
Putting a number on it, the firm estimates index speculation accounts for just $US12.60 of the $US70 increase in oil prices since January last year.
So if index funds are only part of the story, what else is new?
James Hamilton, economics professor at the University of California, San Diego, published a paper in May arguing that a demand and supply imbalance is a major contributor to soaring oil prices.
China, for example, accounted for a third of the growth in oil demand between 2003 and 2006 but its oil hunger has a long way to go.
"During 2006, China used about two barrels of oil per person," Hamilton wrote. "For comparison, Mexico used 6.6 - Chinese oil consumption could triple and they'd still be using less per person than Mexico today."
New Zealand uses about 13 barrels per person per year.
It hasn't helped that petrol in many Asian and South American countries has been subsidised, allowing consumers to keep using fuel unimpeded by rising prices, said Lew Burton, head of derivatives at Goldman Sachs JBWere in New Zealand.
"The natural response to a rise in prices is for demand to moderate or supply to increase," he told the Star-Times. "We now have a situation where oil producers have little spare production capacity and much of the global demand growth is insulated from price and will not moderate."
And while developing countries suck in increasing amounts of energy the biggest scope for reducing demand, say some, is in America and Europe. For oil companies this would be disastrous.
"They make a lot more money now than they were before," said a source, "but at a certain level consumers are going to say `we're fed up and we're permanently changing our habits, we're going to drive more economical cars, we're going to car pool and take public transportation'. And the oil producing countries don't want that because eventually instead of getting a high price for oil they'll be getting lower prices because the demand side of the equation will have changed."
But while demand continues to rise, oil producers can't just turn on the tap to meet it.
Saudi Arabia, for example, still the world's biggest oil producer, has required increasing numbers of oil rigs to maintain output - between 2004 and this year the Saudi rig count doubled. Its oil is also unsuitable for many of the world's refineries.
"Right now the real bottleneck is in light sweet crude which is the preferable type for some refiners," said a source.
"The people who can turn on the spigots and add more oil to the market is Saudi Arabia and they don't have light sweet crude."
Long-term, production will come on stream from other parts of the world to boost supplies from the current plateau, but doubts remain about whether it will be enough to meet the growing demand.
- Sunday Star Times