REGULATION
Capesize.Duringthesameeightyearperiod,thedailyaveragechar- considerations such as (in the case of
terrateforVLCCsincreasedfromUS$33,000toUS$82,500,andthe certain petroleum products) whether
averagedailyrateforCapesizebulkcarriersroseexponentiallyfrom the US or Europe will experience a cold
US$17,500 to US$171,500. These are prices paid by ship owners ormildwinter.
and operators and reflect a genuine, dramatic increase in demand Furthermore, because, by definition,
foroil,petroleumproductsanddrycommodities. commodities derivatives are settled
Many of the complaints about ‘excessive speculation’ seem to against the prices of actual physical
focus on new institutional investors participating in exchange trad- deliveries, they cannot become
ingofderivativeproductssuchasfuturescontractsforcrudeoiland detached from the underlying physical
petroleum products. This is presumably what Senator Lieberman market. If a futures trader overesti-
hadinmindwhenhesaid“Excessivespeculationinoilfuturesiscon- mates the value of a commodity, they
tributingtohighenergyandfoodprices”.However,themechanicsof (literally)paythepriceformisjudgment
thissupposedprocessaredifficulttounderstand. Onemustassume on the settlement date. Such bubbles
thatpoliticiansarenotmakingtheludicroussuggestionthattraders as do occur in respect of consumable
areagreeingtobuyatpriceswhichtheyknowwillbeabovethemar- commoditiesareburstwithinarelative-
ketoncontractsettlementdates.Theimplicationmustbethatinsti- ly short period as prices realign with
tutional investors are consistently, mistakenly agreeing to pay too actual,physicaldemand.
muchforcommoditiesandtherebycreatingapricebubble. That futures trading on commodity
Thisisnottheplacetospeculatewhetherthepriceofaparticular exchanges has little long-term effect
commodityhasbecomedetachedfromtheunderlyingmarket.Butit on prices is supported by the fact that
seems inherently unlikely that a bubble is being created simply the value of commodities for which
because of naïve derivatives trading by institutional investors. The thereisnoexchangeorderivativetrad-
traders who actually buy and sell commodities have not changed. ing has also risen. Indeed, Lehman
Theyarethesamepeoplewhohavetradedinthemarketsformany Brothers have reported prices for met-
years.Thereisnoreasontothinktheirpricepredictionsarebasedon als which are not exchange traded,
anything other than the age-old factors of available quantities of such as chromium, rising faster than
product,worldwidedemand,transportationcostsand,morespecific exchange traded metals such as cop-
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