Oil may end up affecting the cattle pits. Record oil prices have created a severe backlash, and speculators in the oil market have emerged as a key target of those who believe oil prices are significantly higher than supply and demand fundamentals warrant.
While most economists don’t advocate that excess speculation is driving up commodity prices, politicians have been quick to notice that this topic has political legs.
The House Ag Committee just completed three days of hearings on the subject. While it is uncertain what new restrictions/laws will be passed, most feel they’re coming.
Meanwhile, apologists for the speculators point out that they play a vital role in providing liquidity to the markets. They also contend that the market has actually been functioning properly, factoring in the increased demand for oil and the additional risk associated with the uncertainty that characterizes the political situation in Iran and Iraq.
They also point out that the market needed to rise – to ration demand and to encourage increased production. And they make the same argument for corn, claiming the market not only needed to ration demand but usurp acres from other grains to maintain supplies into the future.
As is always the case, it’s much easier to deal with these problems on the fringes than address the underlying problems and drivers that created the problem in the first place. Of course, unbridled speculation should be regulated to prevent or negate the short volatility that they can cause, but they do provide a vital role in terms of liquidity.