How to Burn the Speculators

NEWS: Why is the price of oil so high? Because the Bush administration did to the commodities market what it did to housing.

By James K. Galbraith

Whenever economies sour, politicians blame speculators. But on occasion, they are right to do so. Speculators did wreak havoc in 1630s Holland, 1720s France, and in the American stock market in 1929. That crash led to the Great Depression and 60 years of tight controls on speculation. Now, thanks to our 30-year infatuation with free markets, the controls are off, and the mad gamblers are at it again. Yesterday's burst bubble was housing; today's expanding ones are energy and food. True, we have major long-term energy problems that cannot be laid at the feet of speculators. To avoid catastrophic global warming, we will be obliged to reengineer the country, from housing to transport to forests, and also to develop and export the technologies required for the rest of the world to do likewise. Eight years of George W. Bush's policies have made this much harder, and during that time the world may have passed "peak oil"—that moment when half the recoverable reserves of conventional oil have been drained and burned—so that from now on short supplies will be endemic. Meanwhile, demand grows, notably from China and India, which account for nearly 40 percent of the world's population.

But do supply and demand explain oil prices at $140 per barrel, with voices from Goldman Sachs projecting $200 for next year (a figure that would push gas prices above $5 per gallon) and Russia's Gazprom saying $250, despite a likely US recession? Do they explain the historic price hikes in rice, corn, and wheat, leading to hunger in the developing world? Do they explain the absolutely stratospheric price of copper? No they do not.

Yes, Virginia, speculators can affect the price—if they are large and relentless enough to dominate a market, and especially if they can store the commodity and keep it off the market as the price rises.

http://www.motherjones.com/news/feature/2008/09/exit-strategy-how-to-burn-the-speculators.html

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