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Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
Used to be...isn't any longer....that traders in commodities had to be participants in taking delivery of that product....corn, wheat, oil, pork bellies, orange juice, broadband, etc. The whole point of trading commodity futures, or options, was so that major producers and buyers of a marketed commodity would not have to be constantly challenged by roller coaster price fluctuations from season to season, year to year.
But this is America, the land of opportunity. The land where a person can really get his greed-freak on. And so it was inevitable that traders, having no real interest in taking delivery of tankers of oil, or...orange juice, would be allowed to enter the commodity futures market and profit through skimming. In the case of a barrel of oil, a futures contract traded 27 times (27 opportunities to skim profits).....without the muss or fuss of actually taking delivery on any of it.
That is the exact script from whence credit default swaps originated. AIG, the gargantuan, too big to fail or jail insurance company sold what they called credit default swaps (bets). The shadowy and deep pocketed players in the mortgage derivative market would go to AIG and buy insurance hedging their derivative bets. Nothing wrong with hedging bets.....the problem came when AIG offered default swaps to everyone, including trader/players who had no skin in the game. Default swap buyers or sellers didn't have to own mortgage derivatives to participate, in the same way that oil traders do not have to take delivery of any oil to participate in the oil futures market.
AIG's marketing of default swaps allowed specific traders and trading companies, who had no skin in the mortgage derivatives game, to profit wildly. The 'freeze-up' of the mortgage derivatives, which created the financial emergency in late 2008, came about because values of derivatives and trust in trading 'partners' could no longer be verified. The very reason it was necessary for AIG to receive the largest portion ($180 billion) of the government bailout was because of credit default swaps bets that they could never, in a million years, pay off.
Likewise, the oil futures market. You've probably noticed gasoline prices spiking again. Up to about $3.80 per gallon recently. Same old. But, just like in 2008 when oil prices hit an all time high of $145 a barrel and gasoline increased to over $5 per gallon in California, the higher oil and gasoline prices have nothing to do with supply and demand....
The price of oil is driven by much, much more than supply and demand. This was proven in 2008. Thanks to the recession, global demand in 2008 was actually down and global supply was up. Prices rose, nevertheless. Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd.
According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel.
Why the contradiction?....
....an influx of investment money into commodities markets. Investors were stampeding out of the falling real estate and stock markets. Instead, they diverted their funds to oil futures. This sudden surge drove up oil prices, creating a speculative bubble.
This bubble soon spread to other commodities. Investor funds swamped wheat, gold and other related futures markets. This speculation drove up food prices dramatically around the world. The result? Food riots in less-developed countries by people facing starvation.
Last October, the International Energy Agency....cut the outlooks for 2012 and 2013 by 100,000 barrels a day each from a month earlier. “There is recognition here that the global economy is not growing at a robust pace and it’s going to limit oil demand,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “In contrast, supply is growing at a somewhat faster pace. As long as you have supply growing faster than demand, then that’s going to put downward pressure on prices.”
However, the price of oil and gasoline, as we've seen, isn't based on supply and demand...but instead, speculation and perceptions of fear and greed. Supply is more than ample....
Worldwide fuel consumption is projected to rise to 95.7 million barrels a day in 2017 from 89 million last year, the IEA said. Output is forecast to advance about 1.5 million barrels a day each year to 102 million barrels a day in the same period.
Skimmers drive the prices of commodities.....oil, food, metals, etc....skyward, even when supply and demand does not warrant increases. How is this good for our national economy?
Now, here's the butt-kicker. The hedge fund managers, the buyers and sellers on the commodities exchanges can, and do, drive up the prices of oil, food, etc, entirely detached from supply and demand fundamentals.
Then, profits from skimming commodities, profits under $450,000 per year, are taxed at 20%...the same percentage average middle class workers pay in income tax. Those skimmers making less than $450,000? They only pay 15% in capital gains tax.
In the olden days....that would have been called a 'racket.'
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