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Speculators gamble on anything

If you believe oil companies are gouging customers at the pumps right now, you are undoubtedly right.

But that longstanding tradition increasingly shares the blame with speculators driving up costs.

For that you can thank the same kind of deregulation that led to the recent financial collapse and subsequent recession. It’s the same kind of unbridled market activity that has led to bubbles in the past, just on a larger and larger scale: we never learn.

Worse still, the kind of hedge fund speculation that’s driving up oil prices is doing the same to a host of other commodities, including food. That’s right, some people are getting awfully rich betting on who will starve because of massive price hikes in such staples as wheat, corn and rice. They’re driving up the price just by playing the game.

Where trading in those commodities was once the purview of farmers and their major customers – an insurance of sorts against price fluctuations between the time a crop is planted and the time it comes off the fields – today that accounts for only a fraction of the trades in the market. Now, there may be 30 or 40 bushels of wheat in play for every one that actually exists in a farmer’s field: most of it is on paper.

What was once a fairly stable market has been overrun by the financial services sector.

In 2003, for instance, Wall Street types invested some US$13 billion in food commodities. Five years later, that figure had jumped to $260 billion. Needless to say, that 1,900 per cent increase didn’t correspond to any change in the actual amount of food being speculated on. In fact, it has nothing to do with food: any commodity will do, just as gamblers will find anything to bet on. With food, the industry moves billions of dollars on speculation, trends and expectations, and how others react to those movements. The good doesn’t matter. Except for the billions of poor people on the planet who’ve seen the cost of staples rise dramatically, leaving them hungry and deeper in poverty.

We’ve seen those price hikes here, too, but they’ve had a far less dramatic impact on our budgets. The situation with oil prices, subject to the same kind of speculation, is a little different, as we feel the pinch at the pump, but also in higher transportation costs, which includes delivery of goods as well as the impacts on public transit and air travel, among other things.

Oil prices also have an impact on food costs, as oil plays an integral role in farming, from preparing the land to getting the products on store shelves.

In U.S. Congressional hearings following the last big spike in gasoline prices in 2008, representatives of the oil industry testified speculation could be blamed for perhaps doubling the price of oil beyond the supply-and-demand arguments we typically hear about.

For that, we can thank the U.S. government’s Commodity Futures Modernization Act of 2000, which deregulated commodity markets, stripping away controls in place since the 1930s. You may recall that was the time of the Great Depression, which followed another time of financial market excesses and subsequent crash.

How this came to pass, and what it means for the economy if left unchecked, is the focus of an upcoming book by longtime oil trader Dan Dicker, ‘Oil’s Endless Bid: Taming the Unreliable Price of Oil to Secure Our Economy.’

In a recent interview on CNBC, the veteran of the New York Mercantile Exchange lays out who’s to blame for the situation.

“I would put the investment banks first. They have created and sold the instruments for retail investors and institutional investors to easily bet on the price of oil. The three largest investment banks trade in oil as well and make a couple of billion dollars each trading oil a year, which directly comes out of the pockets of consumers,” he says.

“The investor is next to be blamed. They have fallen to a large degree for indexes and commodity ETFs.

These new participants are exclusively buying; no one is selling and everyone wants to hold. They understand the importance of crude in the global economy. The oil market was relatively stable until the commodity market was allowed to expand with the passage of the Commodity Futures Modernization Act in 2000. We have seen enormous swings both up and down since then, and barring intense intervention, we will continue to see very volatile moves.”

U.S. President Barack Obama had pledged to tackle Wall Street’s foray into the commodities market, and the resultant price spikes and profiteering, but little has been done to date. Not surprising given the billions of dollars invested, the massive profits and the power of the financial sector lobby, despite the meltdown the industry precipitated in 2008.

As many critics have noted, it’s as if the industry and the government learned nothing from the folly of deregulation, nor from the futility of chasing the latest bubble.

Until something is done – preferably before the next crisis – we’ll be paying more for the gasoline we use and the food we eat.

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