Supply, Demand, Speculation, & Gouging: Oil, Metals, Food

[Hannah Bell]

"http://www.niemanwatchdog.org/index.cfm?backgroundid=100&fuseaction=Background.view"

Speculators – not supply and demand – are to blame for skyrocketing gas prices: July 11, 2006

A bipartisan Senate report, largely ignored by the media, says that there's no oil shortage and none is expected. Rather, it's massive, unregulated speculation that is costing consumers billions of dollars – and vastly enriching people like T. Boone Pickens.

The conventional explanation for high gasoline prices doesn't work. The notion that energy demand, especially in places like China and India, created a world-wide oil supply shortage which drove up prices and caused Americans to pay more at the pump cannot be squared with the facts.

The report was barely touched on in the news media but its analysis of petroleum prices demands serious attention. This story is far too important to be left lingering on the back pages of the trade press. Petroleum prices deserve better than a mere repetition of the high-demand-low-supply theory, particularly when it is conspicuously inconsistent with the facts.

[Hannah Bell]

1. Presentation to World Bank: Metals

"In the first part of this paper on the “Commodity Bubble”, I make the case that, in real terms, we have had an unprecedented commodity bubble in this decade. This bubble has occurred because of unprecedented investment and speculation in commodities, largely by way of derivatives. The far more important engine of this bubble has been leveraged speculation by hedge funds....

If you take all the economies in the world, valuing GDP based on exchange rates, the overall global growth rate has not significantly changed since the mid 1970’s. And so the demand pressures on commodities should not have significantly changed either.

So if it is not a new era of supercycle demand growth and supply restraint, what has led to such a high amplitude and long duration bull market in commodities in this cycle. My answer is speculation – nothing more. And speculation on an unimaginable scale."

"http://www.venerosoassociates.net/Reserve%20Management%20Parts%20I%20and%20II%20WBP%20Public%2071907.pdf"

[Hannah Bell]

2. Food

http://www.flonnet.com/fl2316/stories/20060825001904300.htm

Speculation moves forward

C.P. CHANDRASEKHAR

The introduction of futures trading in essential commodities under the reform regime has paved the way for speculative price increases.

FORWARD trading has a long history in the country, but it has never been a matter of much public concern. Until recently, that is. While searching for explanations for the increase in the prices of food that began a few months back, some observers turned their attention to the massive increase in forward and futures trading in commodities. What emerged was revealing.

According to Bloomberg, quoting the Forward Markets Commission, volumes on the National Commodity Exchange, which trades futures contracts in 48 commodities, reached $226 billion in the year ended March 31, 2006. That was more than the $184 billion of shares traded on the Bombay Stock Exchange in the same period. Forward and futures trading had been promoted on the ground that it helped traders deal with market uncertainty by hedging their transactions, and stabilised prices for the final producers. However, the surge in futures trading could not be explained by pure hedging requirements, and obviously reflects an increase in speculative activity.

[Hannah Bell]

4. WHEAT STOCKS - 2006

"According to reports private firms such as Cargill India, Adani Exports and ITC and the Australian Wheat Board have together purchased as much as 30 lakh tonnes of wheat this year. While some of this is for conversion into processed goods in their own facilities, a significant part is for resale at a profit. Private firms have also been involved in trading in other commodities. This indicates that large trading firms have cornered supplies of many commodities at prices higher than the minimum support price offered by the government.

One consequence of these trends has been a decline in government stocks from record levels and a rise in stockholding by the private trade for speculative purposes. Thus the government has managed to procure only 92 lakh tonnes of wheat this year as compared with 147 lakh tonnes last year. As a result, wheat stocks with the government stood at 93 lakh tonnes on June 1, having declined continuously when compared with the level on the same date of the last few years, starting at 413 lakh tonnes on June 1, 2002. Overall food stocks with the government stood at 223 lakh tonnes on June 1, 2006, close to a third of their peak level of 648 lakh tonnes on June 1, 2002. These declines are far more than warranted by trends in production, indicating that the private trade has managed to corner a significant volume of stocks."

[digidigido]

6. Metals or Paper

Fiat money, aka paper money, has no intrinsic value. Gold, sliver and other precious metals
do have value. I bought my house in 2002. The value of the dollar is somewhere less then half
of the price of gold in 2002. The price of my house has doubled relative to the dollar as has
Gold. The value of my house and the price on an ounce of gold have remained sometwhat
constant. Gold is a commodity, my land is called real estate. It has intrinsic value. The dollar,
esp the way the current administration understands fical policy is losing vaue on an almost
daily basis.

[Hannah Bell]

10. I'd look into the economics of global gold production if

I were you. If the mining is controlled by a handful of producers, its an oligopoly that can manipulate supplies for its own ends.

"http://query.nytimes.com/gst/fullpage.html?res=940DE2D6133EF931A25753C1A96E948260"

http://www.barrick.com/

http://www.oligopolywatch.com/2006/07/26.html

The money supply has to be able to expand as production does, & (ideally, in a real democracy) to be free of the diktat of private finance & special interests. That's why we went off the gold standard, & that's why Lincoln financed the Civil War with greenbacks.

[lumberjack_jeff]

13. I think this is exactly right.

Stuff isn't getting more valuable, dollars are becoming less valuable.

[El Pinko]

3. We as consumers COULD do a lot more to pop the speculators' bubble...

...by refusing to buy cars that get less than 35 mpg, by driving less and carpooling, eliminating unnecessary trips and using transit, we could reduce gasoline demand by 1/3 in just a couple of years if we set our minds to it.

If we don't the speculators will reduce our use by making gas unafforable anyway, so acting proactively is the best defense...


Unfortunately, many of us can't cut back all that much on food, at least not volume, but perhaps on quality and cachet.

Maybe the high food prices might help the overweight to get their weight down a bit, but unfortunately, it will probably mean more kids will go to bed hungry...

[Warpy]

5. There are half a dozen commodities bubble markets right now

There is no earthly reason for rice to be up 60% in Asia except speculation. I could see a 25% hike due to bad weather in several prime rice growing areas, but not 60%!

Oil should be around $60-70/bbl just from the fall in the dollar. It shouldn't be over $100.

The wheat harvest in this country didn't fail, nor did it in Russia or northern China. There's another bubble.

Gold is close to double what it should be. There's another bubble market.

The rich have gone insane, creating bubble markets in the hope of luring the less well off into the markets at their peak so they can cash out and laugh about it.

[Norrin Radd]

7. kr

[Hannah Bell]

8. Where is the money from real estate going?

"Commodities are basically the only asset class left standing now that equity, bonds, real-estate and other assets look either incredibly over-valued or down right risky"

"http://www.peakoil.com/gate.html?name=Forums&file=viewtopic&printertopic=1&t=35072&start=180&postdays=0&postorder=asc&vote=viewresult&popup=1"


What's the definition of inflation?

"Too much money chasing too few goods."

But according to estimates, there's no shortage of oil (supply is higher than demand), metal (ditto), various foodstuffs (ditto). Yet many of these materials are at their HIGHEST EVER recorded prices.

Wages aren't responsible for this inflation; they've been basically flat, in real terms, since the 1980s. Nor are global wages doing much better.

Why the price rises? Where's the shortage?

The shortage is in the lack of REAL PROFIT-GENERATING VENUES. Thus the flood of "investor" cash chasing round the globe, inflating one arena after another, despite stable real demand growth. Inflate prices with an onslaught of cash or witholding of supply, rake off your profits, move on.

It's a classic INVESTOR-GENERATED INFLATION. Today's news includes this: "2% own half the world's wealth."

http://news.bbc.co.uk/2/hi/business/6211250.stm

A much smaller fraction owns the bulk of that, & control even more. Though "ordinary people" own assets like pension funds, who makes the investment decisions for those funds?

Wealth demands to hold its value & make a profit - month to month, year to year.

Great concentrations of wealth have the potential to skew markets from normal S/D patterns. Markets DON'T FUNCTION according to theory when too much money & information are held in too few hands.

When you hear about people stealing copper in your city, it traces back to financial speculation in search of profit. When you hear about food riots in India, ditto. When you fill up your car & it costs you double what it did 2 years ago, when state governments cut back student loans because no one's lending thanks to the mortgage crisis, ditto.

The root of it all is extremities of inequal wealth & income, which = extremities of unequal power & unequal life.

Do you like being "farmed"?

[Hannah Bell]

9. Why is the government & the Fed so quick to jump on

wage-generated inflation, but soooo slow to clamp down on capital inflation?

http://www.econreview.com/events/volker1982b.htm

In 1982, Paul Volker tightened money growth by raising interest rates to 20%. The result was +9.5 unemployment, the failure of Main Streets (small businesses) across the country - my own city never recovered, its downtown still looks bedraggled 20+ years later. Volker's action was purposefully undertaken; its savagery was in no way "necessary," or due to some neutral convergence of market indicators.

Yet the capital-generated inflation has been allowed to go on for years. Not only that, it's been ENCOURAGED via tax cuts at the top, financial deregulation, tax breaks for off-shoring & the like.

And the media, & our "leaders" have systematically lied about it, as they're lying now when they focus on "demand from China & India," "tight oil supplies," "bad harvests," "investment in biofuel," etc. as the causes of rising prices, without talking about the role of financial speculation.

I'm hearing about the sky falling all over these boards. That is a crisis meme, & people who buy it are easy prey for those who'd like to herd them into their pre-made "solutions" - solutions, like the "Reagan Revolution," that will only bring MORE OF THE SAME.

Shock Doctrine.

[Karenina]

12. Great thread, Hannah Bell!

K&R!

[Supersedeas]

14. the oligarchy has priorities

[eridani]

11. The swell under the ripples is Peak Oil

However, that doesn't stop oil companies from screwing us by gaming the ripples.