Tuesday, June 03, 2008
Bloomberg carries two stories today about the recent speculation over speculators. That is, the question of how big a role the nefarious "index speculators" are playing in the recently soaring prices of commodities such as energy and agricultural products and, more importantly, what should be done about it.
Boone Pickens says that, when it comes to crude oil - the world's most important commodity - this is much ado about nothing and the entire discussion diverts attention from the real problem of demand exceeding supply:
A U.S. probe into whether speculators manipulated oil prices up to more than $135 a barrel is a ``waste of time,'' billionaire hedge-fund manager Boone Pickens said yesterday.Meanwhile, Caroline Baum presents a much more balanced view - a rarity to be sure for this issue - noting the arguments by investors in airline stocks (Michael Masters) as well as those who fret about government action only making the long-term supply-demand picture worse.
``There's nothing to it to start with,'' Pickens said in interviews at an American Wind Energy Association conference in Houston. ``That's not what's happened. You have 85 million barrels a day of oil available in the global energy market and 86.4 million barrels a day of demand. So the price of oil is going to go up until you can kill demand.''
``What you're trying to do is trying to find a scapegoat and place blame for it when what you have is demand that is greater than supply,'' Pickens said.
It's one thing to identify a problem; it's quite another to legislate or regulate a solution. History is replete with examples of the unintended consequences of government interference in the market. Capping gasoline prices in the 1970s, for example, led to long lines and fuel shortages.There does seem to be a groundswell of support for the government to step in and do something about soaring prices that show up everywhere but in the Labor Department's inflation statistics.
``Commodity futures markets were set up for physical producers and consumers,'' Masters said in a phone interview last week. ``If commodities are an asset class, they should be regulated like capital markets.''
Masters says he thinks Congress should modify ERISA (Employee Retirement Income Security Act), the 1974 law that sets minimum standards for public pension plans, and prohibit them from investing in commodities because of the damage it's doing to the country.
Today's soaring food prices are causing riots and unrest in developing nations. For the 1 billion people who live on $1 a day and spend half that on food, a doubling of food prices is the difference between eating and starving. Surely the government has to do something about speculation.
To the contrary, speculators ``are performing a social service,'' said Paul DeRosa, a partner at Mt. Lucas Management Co. ``The thought of conservation without higher prices is ridiculous and logically inconsistent.''
Of course, the larger (and much more important) issue is not addressed by either Pickens or Baum, namely, the remarkable disparity over the last few years between the rate of increase in the supply of paper money all around the world and the rate of increase in the supply of commodities.