The Absurd Report

Tired of high gasoline prices and rising food costs? Well, here’s a solution. Let’s shoot the speculators. A chorus of politicians, including John McCain and Barack Obama, blames these financial slimeballs for piling into commodities markets and pushing prices to artificial and unconscionable levels. Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don’t understand what’s happening or don’t want to acknowledge their own complicity.

Granted, raw materials prices have exploded across the board. From 2002 to 2007, oil rose 177 percent, corn 70 percent, copper 360 percent and aluminum 95 percent. But that’s just the point. Did “speculators” really cause all those increases? If so, why did some prices go up more than others? And what about steel? It rose 117 percent—and has increased further in 2008—even though it isn’t traded on commodities futures markets.

A better explanation is basic supply and demand. Despite the U.S. slowdown, the world economy has boomed. Since 2002, annual growth has averaged 4.6 percent, the highest sustained rate since the 1960s, says economist Michael Mussa of the Peterson Institute. By their nature, raw materials (food, energy, minerals) sustain the broader economy. They’re not just frills. When unexpectedly high demand strains existing production, prices rise sharply as buyers scramble for scarce supplies. That’s what happened.

“No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn’t invest enough,” says analyst Joel Crane of Deutsche Bank. In industry after industry, global buying has bumped up against production limits. In 1999, surplus world oil capacity totaled 5 million barrels a day (mbd) on global consumption of 76 mbd, reckons the U.S. Energy Information Administration. Now, the surplus is about 2 million barrels per day—and much of that is high-sulfur oil not prized by refiners—on consumption of 86 mbd.

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