Soccer Dad

Let's shoot all the speculators

Robert Samuelson tells us Who's behind high prices.

Their trading might drive up prices if they were investing in stocks or real estate. But commodity investing is different. Investors generally don't buy the physical goods, whether oil or corn. Instead, they trade "futures contracts," which are bets on what prices will be in, say, six months. For every trader betting on higher prices, another is betting on lower prices. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader's gain is another's loss.

Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in selling prices for their grain by selling grain futures. The markets work because numerous financial players -- "speculators" in it for the money -- can take the other side of hedgers' trades. But the frantic trading doesn't directly affect the physical supplies of raw materials. In theory, high futures prices might reduce physical supplies by inspiring hoarding. But that's not happening now. Inventories are modest. World wheat stocks, compared with consumption, are near historic lows.

It's nice to have villains, but sometimes there are just markets. And Samuelson has some potentially good news too.

Recently, the giant mining company Rio Tinto disclosed an average 85 percent price increase in iron ore for its Chinese customers. That affirmed that physical supply and demand -- not financial shenanigans -- is setting prices: Iron ore isn't traded on futures markets. The crucial question is whether these price increases will continue or ease as demand abates and investments in new capacity expand supply. Prices for some commodities (lead, nickel) have receded. Could oil be next?

Now of course there were actions taken that exacerbated the supply problem (like the American refusal to develop its oil resources) but the idea that speculators in some way drove up the prices is complete bunk.

And here's some news that could further depress prices (eventually.)