Playing games with oil and food

I was pleased when I checked my car’s gas mileage the last time I drove to Fargo. I drove on Interstate 29 most of the distance. To avoid the “old lady”, slow-driver stereotype, I kept up with the traffic at a speedy 70-75 miles per hour. Even so, my little Honda Civic did a respectable 43 miles per gallon. Still, it cost me more than $40 to fill up the tank. Even though gasoline prices have gone down some, they are still higher than they were a year ago at this time.

I don’t understand why gasoline costs have gone from $1.96 in January of 2009 to $3.96 in May, 2011. I doubt the price will be back to 2009 levels any time soon. If you look at charts of gasoline prices over the last ten years, the trend has been steadily higher with ever larger spikes and falls over the last five years.

What, I wondered, is the reason for the big ups and downs?

According to economic researchers at the University of Massachusetts, this recent volatility in the oil and gasoline market is not due in large part to the laws of supply and demand. It is not a result of wars and political instability in the Middle East. It is not because people in China and India are finally able to afford a car. All of these things, according to this research, have a small impact. In spite of the wars in Iraq, the political upheaval in Egypt and Libia, the world’s supply of oil has increased at a stable rate. The increased demand created by the growing middle class of India and China is real but accounts for increases in demand of only one to two percent per year.

The study, published by the Political Economy Research Institute, maintains that the reason for a significant portion of our current gasoline prices is speculation on Wall Street. Large investors such as hedge funds and large investment banks like Goldman Sachs or USB have begun speculating in the commodities futures market. These investors have moved to playing the commodity futures market instead of investing in the stock market and trading bonds and derivatives. This is a relatively new kind of scheme made possible by deregulation of the commodity markets in 2000. The level of energy futures trading on the New York Mercantile Exchange is 400 percent greater than it was in 2001 when the rules changed. These players in the market never really own a barrel of oil or a tanker of gasoline. They simply buy and sell future contracts. They can influence the price by buying contracts and holding them off the market until the price goes up. The researchers in Massachusetts estimate 83 cents for every gallon of gas you bought at $3.96 went straight to the coffers of speculators like Goldman Sachs.

Sadly, food markets are subject to the same kind of speculation. Playing the commodity futures market may not be responsible for the gradual rise in the cost of food. Certainly global reserves, crop conditions and demand have some influence on the market. The volatility of the market, however, has been shown to be a direct result of speculation on Wall Street.

Somehow, it seems immoral to me that entities which never touch a barrel of oil, don’t own a gas pump, couldn’t recognize a kernel of wheat, don’t own a scoop shovel or a truck are able to make money on buying and selling commodities without adding any value to them, or making investments in their production, processing or distribution. Futures contracts being bought and sold by elevators, oil companies, flour mills and farmers are useful tools to manage market risk. Speculation is another game altogether. Buying and selling by those who have no real interest in the commodities is a game of Monopoly, played with virtual pieces of paper but the stakes are real money.

Speculation in energy commodities has created a roller coaster in gasoline and diesel fuel prices. Those prices also effect the price of food. Combine the higher energy costs for shipping food products with the speculative price rises in food commodities and the result is food prices which leave millions of people in the world without the means to buy adequate food for their families. People who live on a dollar a day and spend most of their income on food suddenly need two dollars a day to eat the same amount. Grocery store prices quickly rise when commodity prices go up. They rarely seem to come back down by the same amount.

Farmers like the increased commodity prices when the market goes up. Unfortunately, when grain prices go up, input costs usually follow. Sadly, like grocery store prices, input costs rarely follow a dropping market as quickly. In the long run farmers are hurt as much by market volatility as are people buying groceries.

Fortunately, the stock market is a human creation. The rules by which stocks, bonds, contracts, commodities, and debt is traded are all made by the government and Securities Exchange Commission and other regulatory agencies. They can be, and should be, changed.
Copyright © 2011 Janet Jacobson and Sustaining the Northern Plains