Commodity Politics

Chidem Kurdas

President Obama’s choice to head the Commodity Futures Trading Commission, Gary Gensler, reassured members of Congress that he is committed to fighting speculation.  Thus continues the political game that started in early 2008 when oil prices climbed to $148 a barrel. Pundits and politicians blamed financial speculators.

The price of oil collapsed in the second half of 2008 as soon as it became clear that the demand was shrinking and would continue to do so because of the global economic slump. Here’s a surprise: the price of oil is determined by supply and demand. The economic downturn had a dramatic impact not only on current worldwide demand but expectations as to future demand.

You’d think that as the facts sank in, charges that speculators drove up prices would end. But these days vowing to fight evil speculators makes good show and Mr. Gensler had to demonstrate that he’s with the agenda handed to him by Mr. Obama, which is “regulating some of the unsound practices and excessive leverage that helped cause this crisis.”

The word speculator might conjure up the image of shady figures operating on the edge of the law. Nothing could be further from reality. The so-called commodity speculators are mainly institutions such as public and private pension funds and university endowments. Continue reading