KATHMANDU: Recently, a friend and I dwelled upon a question, “Are speculators to be blamed for higher commodity prices?” The conversation centred on the high oil prices and whether or not speculators were responsible for the hike. It is apparent hedge fund speculators are to blame as it has become general consensus and accepted wisdom. The common opinion that the general consensus is
generally wrong and accepted wisdom is frequently a preconceived notion needs to be looked into to reach the crux of the matter.
Speculators normally use their common sense to predict the probable direction of a particular asset before investing in it. Common sense suggests that speculators have to be right about the fundamental direction of the popular economic theory of demand and supply. On the
contrary, speculators lose money if they are wrong. This is an important concept that the mass media seem to perpetually ignore.
Taking facts and evidence into consideration, we will see if speculation is the primary culprit behind the rapid rise in oil prices or not. The primary emphasis would be on the rapid run-up period from 2007 to mid-2008, where oil prices reached a record USD 145 per barrel.
The popular view is that the surge in the price of oil during 2003 to 2008 cannot be explained by economic fundamentals, but was caused by increased financial-isation of oil’s future markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This inter-pretation has been driving policy efforts to regulate oil futures markets more stringently.Another study, conducted by the Federal Reserve Bank of Dallas, explained that energy consumption increases as a country’s economic GDP rises, bt energy consumption in developing countries like China increased two-fold as fast as in developed countries like the US. During the last decade, demand for oil,
especially by developing countries, has been rising rapidly. This would certainly cause a rise in prices. This challenges anyone to provide evidence to the contrary. Blaming speculators for the rise in oil prices is severely misguided and prejudiced. But then, my
notions could differ from yours!(The author is the assistant manager of research and development department at Mercantile Exchange Nepal.
He can be contacted through firstname.lastname@example.org)