‘Excessive Speculation’
In Theory & Reality
By Alistair Feeney
IN 2008, COMMODITIES prices have tributing to high energy and food prices”. Obama proposes giving
dominatedthenewsinawaythatwill theUSCommodityFuturesTradingCommission(CFTC)morepowers
benoveltomostpeopleundertheage to oversee commodity trading and to “investigate cases where
of 40. The oil shocks and three-day excessivespeculationmaybedrivingupoilprices”.
week of the 1970s must seem like Thereactionofcommoditiestraderstosuchcommentshasgener-
ancient history to a generation accus- ally been to dismiss them as rhetoric from people who know little
tomedtorelativelycheapenergy,food aboutthemarkets,orasacynicalattempttoblameinstitutionsand
and road fuel. The unfamiliarity of traders(forwhomvotersarelikelytohavelittlesympathy)formatters
high commodity prices seems to have thatare,infact,outsidethecontrolofanyUSpolitician.Fewtraders
led some people to suppose that this seemtofearconcertedmeasurestoconstraincommoditytrading.
state of affairs is somehow unnatural Withthepriceofroadfueloilbeginningtofall,theremightbeless
and reflective of something that has immediate incentive for politicians to back up their words with
gonewrongwiththemarketsonwhich actions.However,roadfuelseemslikelytoremainexpensiveincom-
the commodities in question are trad- parison to prices of recent years, and the expectation must be that
ed. In recent months politicians, par- thecostofenergyandfoodisunlikelytofallsignificantlyinthenear
ticularly in the US, have been looking future.Theissueisunlikelytogoaway.Itisthereforeworthconsid-
forscapegoats. ering if there is any truth behind the theory of ‘excessive specula-
In June 2008, the US Senate’s tion’.
Homeland Security and Governmental
Affairs Committee held a hearing to
With the price of road fuel oil beginning to fall, there
examine whether financial speculation might be less immediate incentive for politicians to
was affecting the prices of agricultural
back up their words with actions
commodities and road fuel. The
Chairman of the Committee, Senator One of the principal complaints appears to be that financial
Joseph Lieberman, said that “There is investorssuchasbanks,pensionfundsandhedgefundsareincreas-
excessivespeculationinthecommodity inglytradingcommoditiesderivativesasameansofportfoliodiver-
markets that is driving up the cost of sification and that this is driving up prices. It is certainly the case
foodandenergy”andindicatedthatin that such institutions have become much more interested in com-
his view, large institutional investors moditiesinrecenttimes.Commoditieshavestoodoutasanareain
were contributing to this. Senator which there is continued growth and market buoyancy at a time
Lieberman(thoughaDemocraticParty whensectorswhichwouldbemorefamiliartosuchinvestorsarecon-
senator) is a close ally of the tracting or stagnating. And it may that the bullishness which has
Republican Party’s presidential nomi- attracted new participants to invest in commodities has, on occa-
nee,JohnMcCain. sion, served to boost prices. However, there is no reason to suppose
This sentiment appears to be shared thatinstitutionalinvestorshavehadasignificanteffectoncommod-
by the Democratic Party’s Presidential ityprices,stilllessthattheyareadrivingforcebehindthehighprices
nominee, Senator Barack Obama, ofrecentmonths.
whosewebsiteincludesapieceentitled The fundamental reason for current high commodity prices is well
‘Cracking Down on Excessive Energy known. For several years supply has been struggling to keep pace
Speculation to Ease the Impact of withgreatlyincreaseddemandforrawmaterialsfromcountriessuch
Record Oil Price Increases’, which as China, India and Brazil. This is a straightforward, tangible phe-
explainsthatSenatorObama“ispartic- nomenondemonstratedmostclearlyalongwayfromthecommod-
ularlyconcernedthatunregulatedener- ity exchanges of London, Chicago and Dubai, in the burgeoning
gy speculators may be distorting the order books of the world’s shipyards and in the rates payable for
marketbymakingexcessivebetsonthe charteringproducttankersandbulkcarriers.
future price of oil” and that InJune2000,theaveragepriceofanewbuildverylargecrudecar-
“Independent experts across the politi- rierwasUS$71millionandtheaveragepriceofanewCapesizebulk
cal spectrum have argued that exces- carrierwasUS$36.5million.TheequivalentpricesinJune2008were
sive speculation in oil futures is con- US$156 million for a new VLCC and US$103 million for a new
60 SEPTEMBER 2008 COMMODITIES NOW
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