Speculation behind
global commodity price rise
By Ramgopal Agarwala
03/08/08 "Economic
Times' -- - There is now a growing discomfort
about the role of speculative finance in the US, the capital of
global finance. In an open letter addressed to all airline
customers, leaders of airlines in the US have recently requested
the passengers to join them in pushing legislation to add more
transparency and disclosure in the oil markets.
They argue that "twenty years ago, 21% of oil contracts were
purchased by speculators who trade oil on paper with no
intention of ever taking delivery. Today, oil speculators
purchase 66% of all oil futures contracts, and that reflects
just the transactions that are known. Speculators buy up large
amounts of oil and then sell it to each other again and again. A
barrel of oil may trade 20-plus times before it is delivered and
used; the price goes up with each trade and consumers pick up
the final tab. Some market experts estimate that current prices
reflect as much as $30 to $60 per barrel in unnecessary
speculative costs."
Speculators have indeed sharply increased their allocation to
commodity markets from $13 billion in 2003 to $260 billion in
2008 and at present they are not adequately constrained by rules
about margin requirements and other regulations about buying and
selling which apply to equity trades. In fact, there has been
further deregulation in the US in recent years with respect to
speculative futures trading in oil and commodity indices
covering a wide spectrum of commodities including food and
metals.
Eminent financiers such as George Soros and powerful US
senators, such as Joe Lieberman, are arguing that commodity
index speculators are a big part of the increase in commodity
prices. Michael Masters, a hedge fund manager in his testimony
before the US Congress, has said that gasoline prices could fall
to $2 a gallon, half of today's price with legislation barring
commodity index funds. There are now more than 10 legislative
proposals before the US Congress calling for better regulation
of commodity index markets.
At the same time, there are powerful forces in the US against
regulation of such transactions. Investment funds managers and
investment houses such as Morgan Stanley are benefiting from
these speculative activities and they are mobilising public
opinion against increased regulations. California's public
employees' pension fund, the world's largest, earned a 68% rate
of return on its investments in commodity futures and other
investors are rushing in commodity markets.
The vested interests are trying to divert the attention from
regulation by arguing that other factors, including growing
demand from emerging markets such as China and India, is
responsible for commodity price increases. This game of blaming
emerging economies in which the President of the US has also
joined is patently absurd because the rapid growth in India and
China has been going on for more than a decade with no increase
in commodity prices even in nominal terms and cannot explain the
sharp increase in last two years.
Other factors such as drought in Australia and switch of corn to
biofuels can explain part of the increase in food prices but
none of them can explain increases of more than 100% in many
commodity prices in a single year as it has happened in 2007 and
2008. There is little doubt that speculative finance is a key
factor in sudden price increases in oil, food and metals in the
last two years. Amartya Sen in his classical work on famines
pointed out that even when supply situation for food is healthy,
famines can occur because of collapse of purchasing power of the
common man. Today we are witnessing a phenomenon of food riots
caused by food price increases due not to demand-supply
imbalance but to greed of speculators facilitated by lax
regulatory system in the key trading centre of the world.
Given the play of vested interests in US Congress it is not
clear which way the legislation on regulating speculative
finance in commodity futures will move. Policymakers in
developing countries in which price increase in fuel and food
are matters of life and death for the poor cannot remain silent
and accept vulnerability to the price fluctuations originating
in developed countries' financial markets. This must reflect on
what they can do to safeguard their people against the onslaught
of the speculators in foreign lands?
Over the long-term, the dominant role of a few commodity markets
in the West must be reduced. As the centre of gravity of the
world economy shifts to the South and South is becoming a
dominant source of both demand and supply for commodities, it
must develop its own markets with its own rules.
However, in the short run when the contagion effects of the
markets in developed countries are still strong, the South must
stake its claim in contributing to reform of the regulatory
systems in the developed countries because its vital interests
are involved. It should not remain silent when the contagion
from developed economies is leading to mass starvation in its
economies. It should demand, perhaps through international
forums such as G-20, proper regulations in the developed
countries so that the greed of the few in developed countries
does not lead to misery of the many in the developing countries.
It should also use its leverage through institutions such as
Opec to persuade the developed countries to check the excesses
of speculators which could have adverse effects in the long run
on both producers and consumers of oil.
(The author is with RIS, a New Delhi-based research organisation)
Copyright © 2008 Bennett Coleman & Co. Ltd
Click
on "comments" below to read or post
comments
Comment
Guidelines
Be
succinct, constructive and relevant to the story.
We encourage
engaging, diverse and meaningful commentary. Do
not include personal information such as names,
addresses, phone numbers and emails. Comments
falling outside our guidelines – those
including personal attacks and profanity –
are not permitted.
See our complete Comment
Policy and use
this link to notify us if you have
concerns about a comment. We’ll promptly
review and remove any inappropriate postings.
Send
Page To a Friend
In
accordance with Title 17 U.S.C. Section 107, this
material is distributed without profit to those
who have expressed a prior interest in receiving
the included information for research and
educational purposes. Information Clearing House
has no affiliation whatsoever with the originator
of this article nor is Information ClearingHouse
endorsed or sponsored by the originator.)
|
