This question is hotly contested. Traders in commodities futures say futures trading cannot drive up the physical price. It is the physical price that ultimately determines the futures price rather than the reverse. But there seems to be more to it than that. A number of good recent articles suggest that speculation is indeed largely responsible for the massive inflation in food and oil today.  See, e.g. —   



John Mauldin, “Colliding Bubbles, US Unemployment, the Credit Crisis and Oil Price Surge,” June 7, 2008 —

. . . I have been pondering for a few weeks about whether the long-only commodity index funds are really affecting the markets. Basically, these funds have become a huge part of the commodities market. It is clear that enough buying and in size will affect any market, but these funds do not take delivery. They “roll” their exposure as they get close to expiration, so they are not involved in the spot price. In theory, the spot price should be a function of immediate supply and demand.

But, it is not that simple, as Louis Gave reminded me. Looking at recent CFTC data, investors known as “commercials” were long 827 million barrels of oil. In the early part of the decade it was 3-400 million barrels. Commercials are supposed to be those who are hedging their production of oil. But large oil companies rarely hedge, and smaller producers only hedge a portion of their oil (see more below). Has supply increased over 100%? I think not.

Where is the increase in commercial interest coming from? The clear answer is long-only commodity index funds and ETFs. They simply buy baskets of commodities at whatever the price is, speculating on the rise in the price of the overall commodity market. It is a one-way trade . . . .


See also —

Sam Pizzigati, “Oil Prices: A Case of Supply, Demand, and Speculation,” June 9, 2008 —

Looking for villains around the gas pump? Try looking behind the hedges to the shadowy investment world where the super-rich make bets with billions — and regular people always lose. . . .

Grand concentrations of private wealth, history tells us, have a nasty little habit of nurturing wasteful and witless speculation. Wasteful and witless speculation, news reports last week revealed, just happens to be the economic joker in the deck that’s turbocharging our current surge in crude oil prices.

The speculation now doing so much damage at America’s gas pumps comes mostly out of hedge funds, those shadowy mutual funds on steroids open only to the deepest of deep-pocket investors. This special status largely frees hedge funds from any federal financial oversight and regulation.

Hedge funds can essentially do whatever they choose. They typically make their money playing games with money. In the oil market, for instance, they have no interest in ever using the oil they sign “futures” contracts to buy. Instead, they buy and sell the futures contracts — with borrowed money. . . .

And other good articles:

Philip Davis, “Commodities Prices: Speculation Exposed,”, May 21, 2008

“ICE, ICE, Baby”, Star-Telegram, May 19, 2008

Mario Osava, “Agriculture: What Is Really Causing ‘Agflation’?, May 4, 2008.

14 Responses

  1. Thanks, Ellen. I knew I could count on you for the straight scoop.

    I keep reminding myself of the Buckminster Fuller quote that begins your Money Reform Think Tank and that I keep on the fridge: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

    Would there be any way to “pilot” the insights of your book, articles, and blog or does change require convincing the federal powers that be to “flip” from private to public issuance of money?

  2. This is something people in the food industry have been watching very closely. Between the high cost of shipping our food and purchasing it, everyone is really looking for one villain to point at. It seems like one month Ethanol was the problem, while this month everyone is pointing the finger at speculators. What I hope is that the CFTC takes a serious look at speculation, and if they are to blame, some serious changes are made!

  3. Of course rising energy prices have nothing to do with escalating geopolitical tensions in the middle east, increased demand by emerging economies, or the discounting of the prospect that “peak oil” theory may be accurate.

    It’s obviously the traders and speculators; and, please, pay no attention to the man behind the curtain.

    Oil prices are probably in a bubble, meaning market participants are basing today’s price on what the world may look like in 30 years.

  4. I would tend to see it the other way; the speculators point to rising tensions in the Middle East, etc., so you won’t look behind their curtain. The only thing that can explain a doubling of the price of rice in the space of a couple of months is speculation; the population hasn’t doubled and the supply of rice hasn’t dropped in half. Prices go up when demand (money) goes up faster than supply; and the speculative hot money has been piling into commodities (including food) because it has fled real estate and has nowhere else to go.

  5. This piece by Michael Klare in “The Nation” yesterday —–links the speculation explicitly to the geopolitical scene and its effect on the price of oil. .”Well, let’s see, a Middle East conflagration could increase the price of oil to $200/barrel, so hey, let’s bet on it. Wheee….betting and winning on the world going to hell in a handbasket sure is lucrative and fun.”

    The point of the article is that Cheny and Bush, with their feet planted firmly in the fifties, their greed on behalf of their oil cronies, and their complete obtuseness regarding energy policy, created the scenarios that make such unprincipled speculation an option. Which, while just as egregious, doesn’t diminish the total lack of principles, morals, or values on the part of the speculators, either.

    It appears that what’s driving up the price of food and oil is simply “capitalist hardball” played by giants who have lost all sense of connection to anything except each other and their dreams of gold. It is a reminder that “leadership” resides at the grassroots level, while the “powers that be” play out their insanely old and primitive games of empire, greed, and power. Aside from using public transportation, going local as much as possible, and trying to keep democracy alive….there’s got to be more that can be done.

  6. Thanks Anne! It is a rather insane world, where we admire the super rich who get that way speculating. Nobody seems to ask who loses all the money the speculators win by playing their computers. We just assume our money is supposed to “make money”, without making anything to earn the money. If our money isn’t out there making money, we’re not being responsible savers; but making money from whom? There must be another way to have “security” besides starving out the Third World.

  7. Another angle on this topic. Any further comment/insight from this perspective, Ellen? Thanks as usual.

  8. Thanks Ann! Yes I’m sure the falling dollar is a significant factor. Ellen

  9. Aloha I have enjoyed reading the articles and comments. For those interested in a historical perspective, I recommend a study of the south sea bubble that ruined the English financial system in the mid eighteenth century. The melt down created such a conservative reaction that the English economy went arthritic for decades. Instructive is that many of the participants knew it was a bubble and a complete fraud yet continued to play.

  10. Probably one of the most informative exposes` on the role speculation has played in the energy markets came from Michael Masters of Masters Capital Management, LLC during testimony before the Senate Committee on Homeland Security and Governmental Affairs delivered on May 20, 2008.

    If nothing else, read the first paragraph on page 4.

    Tom Chechatka

  11. Yes, I read that, thanks!

  12. Ellen Brown,

    Congratulations, we are spreading the news. Your book should have a Spanish & Portuguese edition, for the readers of Latin America.

    May Obama save the Federal Reserve.

    Armando Rozario – Cabo Frio, BRAZIL

  13. Hi, just wanted you to know I have saved you to my Google bookmarks because of your great blog layout :). With that said, seriously, I believe your site has one of the cleanest design Ive seen yet. It honestly helps make reading your blog a lot easier.

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