OPINION> Debasish Roy Chowdhury
|
OPINION> Debasish Roy Chowdhury
|
|
A world damned by speculation
By Debasish Roy Chowdhury (China Daily)
Updated: 2008-07-11 07:37
"I have switched to commodities," Uncle 1 declared solemnly. "Me too, stocks are getting far too risky," concurred Uncle 2. Attending family gatherings on my vacations in India, I often find myself sandwiched between these two characters, who first lure me to their corner with interesting questions about my work, then drift into their jargon-filled world of stocks and mutual funds. Stranded in their midst, I suffer their animated exchange of stock tips and top-secret "inside information" on companies. Both my uncles are retired engineers. The instruments they dealt with all their working lives were anything but financial. They are a kind of financial converts who, like millions in India and China, baptized into stocks to enliven their twilight years. So I have reconciled myself to enduring their zealous discussions centered on such dead bores as price-earnings ratios and rights issues. But it was somewhat different last year. They didn't seem that interested in stocks anymore. With the subprime crisis bleeding the bourses, that didn't seem out of the ordinary. What was striking was their newfound passion for commodity futures. It was almost like they had found a new religion. "The real money is in oil and gold," pronounced Uncle 2 as Uncle 1 nodded in agreement. Oil hadn't touched $100 a barrel at the time. Today, as it flirts with $150 and the roar against commodities speculation gets louder across the world, my uncles' wise words ring in my ears. Malaysia's prime minister wants the world to consider suspending oil futures trading to prevent speculation. German leaders are calling for an outright ban on oil speculation. And a US congressional investigation into the price surge may be tilting toward nailing speculation as the main culprit. When the Organization of Petroleum Exporting Countries (OPEC) says the high oil price is not the product of any demand-supply imbalance, it's absolutely right. The runaway prices have little to do with actual demand and supply. It's speculation based on the anticipation of a supply crunch that's pushing up the prices. And, oil has emerged as a great hedge against a weakening dollar, global economic slowdown and the resultant stock meltdown. Hence, as share declines have erased almost $11 trillion from equity markets worldwide this year, oil has risen over 50 percent. In June 2006, when oil futures were hovering around $60 a barrel, a US Senate probe estimated that some $25 of it was the product of pure speculation. Going by that, as much as 60 percent of oil prices today could be speculation-driven, according to F. William Engdahl, author of A Century of War: Anglo-American Oil Politics and the New World Order. Oil futures today can be bought by anybody who can't find anything else that's secure enough to bet on. Thus commodity index funds, financial institutions, hedge funds, pension funds and myriad other investors big and small have been pouring billions of dollars into commodities in general and oil in particular. Investments in commodity futures are estimated to have risen from $13 billion at the end of 2003 to $260 billion in March 2008, a 20-fold growth in less than five years. A futures contract is an agreement to take or make delivery of a specific quantity of a commodity on a particular date at a particular price, essentially to guard against price swings. But most of those buying into oil these days will never make or take any delivery of the real oil. They have nothing to do with physical oil, but their bets on "paper oil" is wreaking havoc on those who do. Rising oil prices and the resultant inflation are making life harder for billions, pushing more people into poverty, straining the resources of governments and raising the risks of social unrest. It's time to ask ourselves if we can really afford speculation in critical commodities like oil. Allowing the market to decide oil prices is fine, but let that market be composed only of people who are actually buying and selling oil. Sorry, uncles, you don't belong there, so stop making my life miserable. E-mail: drc@chinadaily.com.cn (China Daily 07/11/2008 page8) |
