from Too Much: A Commentary on Excess and Inequality:
Oil Prices: A Case of Supply, Demand, and Speculation
Looking for villains around the gas pump? Try looking behind the hedges to the shadowy investment world where the super-rich make bets with billions — and regular people always lose. June 9, 2008
By Sam Pizzigati
In the late 1990s, we had the stock market bubble. That popped. Then we had the housing market bubble. And that popped. Last week the market for crude oil bubbled to an all-time high, nearly $140 per barrel. We seem today to be forever blowing bubbles. Maybe we should stop and ask why.
After all, back in the middle of the 20th century, our economy didn’t careen from one bubble to another. Why now all the bubbles — and busts? Here’s why. We’ve become too unequal. We have too much wealth concentrated in too few pockets.
Grand concentrations of private wealth, history tells us, have a nasty little habit of nurturing wasteful and witless speculation. Wasteful and witless speculation, news reports last week revealed, just happens to be the economic joker in the deck that's turbocharging our current surge in crude oil prices.
The speculation now doing so much damage at America’s gas pumps comes mostly out of hedge funds, those shadowy mutual funds on steroids open only to the deepest of deep-pocket investors. This special status largely frees hedge funds from any federal financial oversight and regulation.
Hedge funds can essentially do whatever they choose. They typically make their money playing games with money. In the oil market, for instance, they have no interest in ever using the oil they sign “futures” contracts to buy. Instead, they buy and sell the futures contracts — with borrowed money.
That can be risky. But the rewards can be staggeringly huge. A sweet deal for sweet crude can stuff hundreds of millions, even billions of dollars, into hedge fund manager pockets.
Futures contracts have been around, of course, for years, and such contracts can serve a useful purpose. Airlines, for instance, can use futures “to lock in” the price they’ll have to pay for oil in the future. But manic trading in futures has no redeeming social value. Such trading, as billionaire investor George Soros told a June 3 U.S. Senate hearing, only serves to help inflate commodity price bubbles.
Government regulators of commodity markets used to recognize this reality. They placed rules on commodity markets that limited speculative trading. Those rules for energy, by the end of 2000, had almost all been deregulated away. ......(more)
The complete piece is at:
http://www.toomuchonline.org/articlenew2008/june9a.html