Tuesday, April 19, 2011

Are Rising Oil and Food Prices a Scam?

By Danny Schechter
April 19, 2011

The global economy and its recovery, and the living standards of millions of plain folks, are now at risk from the sudden rise in oil and commodity prices.

Read on.

3 comments:

Anonymous said...

Oil is one thing but I don't see how there can be widespread speculation in agricultural commodities.

For oil, a speculator buys a futures contract on margin, putting down a fraction of the final price. Then along comes an arbitageur who sells a futures contract and offsets the risk by buying the oil in the spot market. The difference between the (higher) future and the (lower)spot minus costs equals the arbs profit.

The actions of the arbs bring future prices and spot prices into equilibrium. Since the price paid by the consumer is based on the spot price, the arb has inflicted speculation in futures on to the consumer.

But one of the arb's costs is storing the oil until the futures contract expires. This is not too hard to do because there are a lot of tankers out there. But how does the average investor store wheat or canola oil? Transfer costs are high so the investor does not want to move the commodity too often. Then there is shrinkage from rats, etc. All this before interest on the money borrowed to buy the commodity.

So I think it is obvious that it is much harder for high future costs of agricultural commodities to get translated into high spot prices. So we cannot be quick to blame rising food prices on speculators.

Brian said...

Agriculture around the world depends on oil products to keep growing their crops. It doesn't help that most "croppers" have gone out of business besause of Agri-industry. Nothing has changed from the "lesson" of the GFC. The profits get bigger, the competition gets smaller.
The US has taught the world super-greed!

Anonymous said...

To get an insightful overview of happenings in today's world, (& yesterday's as well), read 'Critical Path' by R. Buckminster Fuller. It will open your eyes & your mind.