Who's to blame for oil and food prices?

JR: Although I don't agree with much of the following, this does give us another perspective, however flawed it is. Granted, it is a complicated issue with many variables. There is however, definately a "speculator's" spin to this article ]

http://www.theglobeandmail.com/servlet/story/RTGAM.20080519.wrreguly0519/BNStory/energy



ERIC REGULY

ereguly@globeandmail.com

May 19, 2008 at 11:20 AM EDT

ROME — It's blame the speculators season.

Almost every commodities-related press conference I have listened to or attended in recent weeks has fingered "speculators" for the soaring prices of everything from oil to corn. Speculators watch out. In 1918, Lenin recommended the financial vampires "be shot on the spot" in times of famine. (Shakespeare had a similar line about lawyers).

At a recent United Nations Food and Agriculture Organization (FAO) press conference, director-general Jacques Diouf said the near-vertical price curves have been "exacerbated by speculative activities in the Chicago market, by hedge funds and other funds. [ETF]" At the International Energy Forum conference in Rome, Nobuo Tanaka, executive director of the International Energy Agency, mentioned "large increases in money flows" - code for speculators - as a factor behind the triple-digit oil prices. Iraq's Oil Minister said tight supplies couldn't take all the blame for the high prices, because "there's some surplus on the market." The conclusion: Speculators are at fault.

Repeat the accusation enough and the world will soon believe that speculators - whether hedge funds, pension funds or secretive trading powerhouses like Glencore or Gunvor - can take much of the blame. You can just see them laughing as sub-Saharan villages go hungry or Wal-Mart workers skip meals because the cost of filling up the Chevy has doubled.

While it seems logical to suspect that speculative money (for lack of a better term) flowing into commodities has to put upward pressure on prices, it's crazy to think this sort of buying is the devil in every case. Not all commodities are created equal.

Take oil - $10 (U.S.) a barrel at its low in 1998, $125 today. Oil is the world's deepest and most liquid commodity market. At current prices the value of annual global output is close to $3.75-trillion, or more than triple Canada's GDP. Speculators just don't have the firepower to move the price in such a massive market.

Of course, if enough of them gang up to play the futures game together, there may be a short-term blip. Beyond that, forget it. They're latching onto a trend, not creating it. Furthermore, they're not consuming the oil or storing it in salt caverns. It's still around to be burned.

The savviest analysts - among them Barclays Capital oil team in London - long ago discounted speculators, the falling dollar and soaring drilling and development costs for oil's new luxury status.

The truth, they have been saying, is that we're running short of oil, certainly cheap oil, as consumption climbs relentlessly.

Even though some big countries (United States, Italy, Spain) are in recession or limping toward one, demand growth is barely slowing. Meanwhile, some traditionally robust producers are flagging. In March, Mexico's oil production was almost 400,000 barrels a day less than it was a year earlier.

Speculators would also find other big, liquid commodities - copper, nickel, natural gas, perhaps gold - hard to move beyond the short term. But what about food commodities, which are far more thinly traded?

Again, it depends on the food. Take corn, whose price has more than doubled in two years. The first question to ask is whether corn is a food or a fuel. It's both. One-third of the U.S. corn crop is devoted to ethanol. Because corn is being increasingly used as a fuel, and is becoming interchangeable with gasoline, it's being priced off the benchmark fuel - oil. It should come as no surprise that corn and oil prices are more or less tracking one another. "Corn and crude oil prices are converging," says Goldman Sachs agricultural commodities analyst Ruifang Zhang.

Rising corn prices can lift the prices of other foods as well. As more land is devoted to corn production, less land goes to, say, soybeans, pushing the price up. Are speculators driving up soybeans, or spring wheat or rapeseed? Maybe on the margins. The better question to ask is whether the speculators even bother to jump into such thinly traded markets. They like loads of liquidity, a feature not normally associated with many crops.

Rice and cotton just may be the exceptions. In March, cotton futures soared even though cotton stocks were at their highest in decades. At one point, the open interest in cotton futures was bigger than the whole cotton crop. This could not be fully explained by physical supply and demand alone.

One possible reason is that pension funds, like California's Calpers, are wading into the commodities market as prices for real estate and other investments tumble. But since they are long-term buyers, not hot-head opportunists, it's hard to imagine they have extraordinary influence on prices.

Rice prices have climbed 125 per cent since last year. Sure, blame the speculators. But the more compelling reason is waning exports. India, Vietnam, Egypt and Indonesia have clamped down on rice exports to keep domestic supplies intact and dampen food inflation.

Of course, speculative money could rush into commodities as ever bullish price forecasts become the norm.

In the meantime, it looks like too many mouths are chasing too little food and too many drivers are chasing too little gasoline, and they can take most of the blame for the price rises.

[JR: The "speculators" (ETFs) and the market gurus that bet on both on the highs and lows can't loose. Tout a shortage and the public's increased demand (preservation or greed) will create that shortage, which invariably increases the price. I also can not buy the "peak oil theory". My father worked in oil industry most of his life and retired from the oil fields in South Louisana. I too worked in the oil fields for a time, just long enough to understand the covert relationship between BIG OIL and governments. Congress only knows what the oil industry tells them. Since most of the members of Congress benefit from BIG OIL, so rarely challenge them except when the consumers becomes outraged.]