Thursday, April 03, 2008

Speculation has been pushing energy and commodities prices higher

An Op-Ed piece in BusinessWeek by Ed Wallace entitled "There Is No Gas Shortage" confirms something I have long talked about, which is that rampant speculation is the primary cause of high energy and commodities prices, not growing demand or supply shortages. He lays out the case for (against) speculation.

To be clear, sky-high energy and commodities prices are not caused by "Big Oil", but primarily by the big Wall Street investment banks and hedge funds. Wallace tells us that:

As for the speculators, in 2000 approximately $9 billion was invested in oil futures, while today that number has gone up to $250 billion. Now, if any publicly traded company had an additional $241 billion put into its stock in the same period, its stock would rise out of sight too—even if the company was not worth anywhere near that amount of market capitalization.

Moving on to the weak U.S. dollar as a primary cause for skyrocketing oil prices—there is "some" truth in that statement. But consider this: The dollar has depreciated 30% against the world's currencies since 2002, while the price of oil has gone up 500%. So is it the weak dollar that has caused a 500% increase in the price of oil, or is it the extra $241 billion worth of speculation? You can make the call on that one.

Possibly just to ensure oil prices don't respond to real-world market conditions, Goldman Sachs (GS) forecast on Mar. 7 that turbulence in the oil market could cause oil to spike as high as $200 a barrel. This flies in the face of all known information—but then again, Goldman Sachs is the world's biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a widely watched barometer of energy and commodities prices.

I am no fan of Big Oil, but let's be clear that it is the Big Money fueling speculation that is the root of the problem.

OTOH, the Federal Reserve may know about all of this but realize that if they actually try to stop or slow the mindless speculation in commodities, then the sole remaining source for outsize profits on Wall Street will suddenly disappear and then the house of cards will fall down. Seriously, Big Profits from commodities trading may be the only thing keeping Wall Street afloat other than money directly from the Federal Reserve. Maybe the theory is that big profits from trading commodities will permit Wall Street firms to "profit" their way out of the mortgage mess that they created without an even bigger bailout by the government.

-- Jack Krupansky

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