Pension funds, Wall Street banks and other large investors that have no intention of taking delivery of fuel have increasingly pumped money into contracts for oil and other commodities as a hedge against inflation when the dollar falls.
After more than a half dozen hearings in Congress on the issue, Democratic House lawmakers said they intend to tighten restrictions on pension funds, investment banks and other large investors that they blame for driving up fuel prices.
Many Republicans, analysts and regulators, however, say soaring oil prices are a reflection of macro-economic factors, including the falling dollar, unrest in the Middle East and increased demand from countries like China and India.
But Saudi Arabia and other OPEC countries say there is no shortage of oil and instead blame financial speculation.
Oil prices rose $1.38 to settle at $136.66 a barrel Monday on the New York Mercantile Exchange on disappointment over Saudi Arabia's modest production increase and concerns that output from Nigeria will decline.
Saudi Arabia said Sunday it would add 200,000 barrels per day in July to a 300,000 barrel per day production increase it first announced in May. But that pledge at the meeting held in the Saudi city of Jeddah fell far short of U.S. hopes for a larger increase.
"Make no mistake about it, the excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling through our entire economy," said Rep. Bart Stupak, D-Mich., who chaired the hearing of a House Energy and Commerce subcommittee.
But Rep. Joe Barton, R-Texas, said insufficient supply is the main driver behind rising energy prices. He called for increased domestic production of oil, natural gas and coal.
A series of charts detailed the massive influx of money pouring into the oil futures market from pension and hedge funds and investment banks whose only intention is to make money - not actually own oil, reports CBS News chief investigative correspondent Armen Keteyian.
Speculators have increased their share of oil futures contracts on the Nymex to 71 percent this year, up from 37 percent in 2000, according to figures released by Stupak's office. At the same time contracts held by traditional oil users have fallen to less than 30 percent from over 60 percent.
Experts testified that by ending or severely limiting speculation, the price of oil could drop as much as 50 percent within a month, Keteyian reports.
Lawmakers have cited the pain prices are causing airlines, trucking companies, farmers and consumers in calling for restrictions on speculative trading. At the pump, gas prices dipped less than a penny overnight to remain at a national average of over $4.07 a gallon, more than $1 above the year-ago average, according to AAA and the Oil Price Information Service.
A panel of analysts and oil industry experts told lawmakers that the recent influx of institutional dollars has disrupted the futures market's traditional function as a tool for the buying and selling of commodities.
Panelists said pension funds, sovereign wealth funds and other large investors have taken advantage of loopholes that let them bypass speculative limits imposed by U.S. regulators.
In the last five years, investments in index funds tied to commodities grew to $260 billion from $13 billion, according to testimony from Michael Masters, managing member of the Virgin Islands-based hedge fund Masters Capital Management.
Sen. Joe Lieberman, I-Conn., has floated a proposal to ban pension funds and other institutional investors from futures exchanges altogether.
Northwest Airlines Corp. Chief Executive Douglas Steenland endorsed that idea Monday, and also urged lawmakers to close loopholes that allow traders to dodge U.S. speculation limits by trading on foreign exchanges or through over-the-counter transactions.
"Our highest priority is to tackle the overall price of fuel which is now 40 percent of our cost pie," Steenland told lawmakers. "Addressing excessive speculation is the most immediate remedy Congress could deliver."
The debate over oil speculation spilled onto the campaign trail over the weekend with presumptive presidential contenders Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., sparring over who would be tougher on policing energy futures markets.
House Democrats on Monday suggested a range of actions, including: higher margin requirements, stricter position limits and increased disclosure of unregulated over-the-counter trades.
Energy and Commerce Committee Chairman John Dingell, D-Mich., said those measures and more "need to be debated, evaluated, and acted on, sooner rather than later."
In prepared testimony, New York Mercantile Exchange Chief Executive James Newsome said limits on oil trading are "misguided." Such restrictions would drive large investors toward less transparent, less regulated markets, doing more harm than good.