Discover more from Overcoming Bias
Who to blame for rising oil prices? Why not speculators:
Hedge funds and big Wall Street banks are taking advantage of loopholes in federal trading limits to buy massive amounts of oil contracts, according to a growing number of lawmakers and prominent investors, who blame the practice for helping to push oil prices to record highs. … Some Democratic and Republican lawmakers allege that gaps in oversight are allowing deep-pocketed speculators to manipulate prices. …
George Soros, one of the nation’s leading investors, testified in a Senate hearing this week that index funds were contributing to the rapid rise in commodity prices and were possibly creating a bubble. If it were to burst, sending prices tumbling, the fallout could wreak havoc on banks, retiree funds and colleges across the nation. … Under pressure from voters, lawmakers are pressuring the CFTC to take even more forceful action to regulate the commodity markets.
This is nuts. "Manipulation" is an action that causes a harmful chain of events that comes back to benefit the actor. Maybe a large supplier like Saudi Arabia could "manipulate" by holding back production and to benefit them by raising the price of what they sell. But hedge funds are not suppliers. By pushing up prices now via speculation they are betting on higher future prices, not causing them. If anything, their act causes reduced usage now leaving more oil for the future, which lowers future prices, which hurts them. They only gain via the chain of events whereby they win their bets and inform the rest of us that oil will be scarcer than we thought, which if true is exactly what we need to hear.
Oil Scapegoats
If you follow the link nick (Nick Szabo) gave, you will read that the biggest of the recent investors in commodities have been pension funds, which hold the savings of ordinary people -- most of which do not belong to the "rich actors" that Phillip Huggan seems to want to pin the blame on.
Also, can Phillip document his implication that if credit were unavailable for the purpose, then investors would not have run up commodity prices in recent months and years? Yes, I know that historically professional commodity traders have made heavy use of credit: it seems though that the recent flight to commodities is the doings of investors other than commodity traders as traditionally conceived.
The main cause of the oil price rise from $8 a barrel ten years ago to $135 now, is that there are credit forces that case oil prices to rise too much and fall too much, and that this whipsawing does not also occur in planning oil refineries. When prices were $8, no one built refineries. No there are no refineries.I know the real concern here is over the last two years. But the Netherlands have $10/gallon oil (they pay the social costs of pollution) yet enjoy a much higher standard-of-living than Americans. So I think the recent ruckus is just politicians trying to gain brownie points; is a non-issue to me.
I agree there is no manipulation, but I don't see why CFTC shouldn't regulate commodity markets. Without controls on how credit can interface with traditional capital, you get hedge funds tanking price signals in the long-term. You give credit to rich actors on the assumtion it will help them create even more wealth using the same processes that assumingly allowed them to get rich in the first place. But these actors are using novel processes to "invest" their credit in ways they clearly don't understand as well as they understood their traditional capital field that got them rich.