Who’s to blame for soaring commodity prices? Inquiring minds want to know.
How do we explain crude’s rapid ascent from $50 a barrel at the beginning of 2007 to today’s nosebleed $150 vicinity? It depends whom you ask.
According to some, sky high oil prices have nothing to do with below-average inventories or supply outages in the Middle East and Nigeria.
What about global demand from emerging mega-markets like China and India driving oil prices to higher platitudes? There’s no connection.
Falling production from Mexico? Wrong again.
And if you think crude oil’s run is related to a weak U.S. dollar, you’re also wrong.
And what about surging prices for agricultural commodities like corn and wheat? Again, it’s not what you think.
Sky high agriculture prices have absolutely nothing to do with the record flooding in the Midwest part of the U.S., which has caused an estimated $8 billion in crop damage.
And if you believe the rising cost of bread and cereal is because of the fact that elevated oil prices have increased the cost of transporting all of this wonderful food, you’re one lost sailor.
And what about the ridiculous cost of animal feed? Maybe the pigs, cows and chickens are eating more than they used to, but none of it has any bearing or relationship to world events or anything else around us.
If these aren’t the culprits, then whom can we blame for runaway commodity prices?
For the answer, just ask Rep. Bart Stupak of Michigan. He knows exactly what makes the complex commodities markets go up and down, especially up.
According to Stupak, “Your pension fund manager may be using your retirement money to drive up the price of oil.”
What a revealingly novel thought.
For those of you keeping score, Stupak has a law background and he earned a bachelor’s degree in criminal justice from Saginaw Valley State College. He can now add commodities trading, with a Ph.D. in the oil market, to his resume of achievements.
If you’re not satisfied with Stupak’s stupendous explanation of why commodity prices are chewing a hole in your pant pockets, perhaps the answers provided by Sen. Joe Lieberman of Connecticut will clear the fog.
Lieberman made the brilliant suggestion that pension funds and other large investors should be banned from investing in commodities altogether. After stiff opposition and possibly recognizing that he had grossly miscalculated, he later recanted his Snow White fairyland solution.
Where does he get such original ideas?
It’s hard to say, but Lieberman did receive a law degree from Yale Law School in 1967. I’m not 100 percent certain if commodities were part of the curriculum, but if Lieberman knows everything there is to know about the law, and you’d be a fool to think he doesn’t, he must know something about commodities. At the very least, he’s consumed a piece of bread, filled a tank of gas and cracked an eggshell or two.
Other critics, mostly those with law degrees working for the government, share similar views with our aforementioned commodity scholars. The common refrain: “Pension retirement funds, index funds and hedge funds are to blame for sky high commodity prices.”
Never mind that these “speculators” almost never take physical delivery of the commodities they’re investing in because they replace expiring futures contracts with ones further out into the future. How do you manipulate a market without nefariously reducing supply?
And what about a recent report on the matter from the influential International Energy Agency (IEA)? “There is little evidence that large investment flows into the futures market are causing an imbalance between supply and demand, and are therefore contributing to high oil prices.”
Also never mind that this nation’s largest retirement system (CalPERS) has just one-half of 1 percent of its $240 billion trove invested in commodities.
Two of the largest commodity index exchange-traded funds (ETFs) in the U.S., the iShares S&P GSCI Commodity Indexed Trust (GSG) and the PowerShares DB Commodity Index Tracking Fund (DBC) have collective assets of about $4 billion.
There’s no denying these are significant amounts of capital invested in commodities, but hardly enough to rig and contort a market.
And besides, are these the real culprits for out-of-control commodity prices?
Should pension funds along with other investors that use commodity index funds as a hedge against long-term inflation be penalized with new regulation? Is that the right answer to reducing the inflationary pressures of rising commodity prices?
Certain Washington lawmakers think so. And so do billionaire George Soros, the airline industry and the International Monetary Fund.
Forget about the real life causes, the complex factors and other mitigating reasons for surging commodity prices. None of it matters.
The commodity scholars already have it all figured out.
They know best.
And they also know exactly whom to blame for sky high commodities: Anything and anyone but themselves.
Ron DeLegge is the San Diego-based editor of www.etfguide.com.