A proposal that comes around from time to time has re-emerged in light of the skyrocketing prices of oil in the global markets. As oil pushes towards $100/barrel, the petroleum secretary of India has proposed abolishing the trading of oil in commodity markets.
This is not new, really. During WWII, the federal US government banned trading in onions, potatoes, and other foodstuffs – the uncertainty over whether these products would be available to trade actually led in no small part to the diversification by the CME into financial products in the 1970s.
Nevertheless, some things are really interesting to note. First, trading in oil is no longer just about the (future) supply and demand for oil – as the article reports:
the market has gone from a small group of oil users and producers to a full-fledged investment arena in recent years, like stocks or bonds. Prices can move according to intangible factors like fear, just as they do in the equity markets, the analysts say. Investing in oil has also become a hedge against a weak dollar.
This last bit in the important one, that what distinguishes the contemporary period of financialization from earlier ones is that there is a constant, unrelenting push to draw more and more markets into tension with one another, via cross-product hedges. This is not new per se, but it has accelerated enormously.
So now oil doesn’t just move with oil-related news, it now is systematically connected to things like credit markets in the US, account deficits in Australia, and exchange rates in the EU. And as we will see when something inevitably goes to hell, what were once uncorrelated risks across seemingly independent markets will in retrospect be (shockingly!!) seen as interdependent.
The other interesting piece of this is the question of whether or not banning speculation would indeed result in less volatile and lower prices. The argument usually is that futures markets reduce rather than increase volatility (which I find not particularly convincing, frankly); and that blaming futures for price increases is light blaming a thermometer for cold weather. And yes, this is what the exchanges say: “‘Nymex is just a central point where buyers and sellers can come to exchange their wares,’ Richard Schaeffer, the chairman of Nymex said in an a telephone interview. ‘We don’t make the prices. We make the prices known.'” Good stuff, man. Good stuff.
I’d be interested in seeing if there is a way to maintain a market but keep in somehow outside the retinue of investment vehicles in global finance. A financial economist would, I think, say this is not possible, or desirable. I’m not so sure, myself. There are restrictions on ownership of land in lots of places, and restrictions on speculation of currencies in others. The trick is not to ban speculation per se, but to make sure that a large enough proportion of traders in the oil markets are primarily concerned with the oil markets. Maybe impossible, but not out of the question.
And to leave the performativity folks with the money quote:
“Mr. Srinivasan’s idea is based on a widely held belief that investors are artificially driving up oil prices. Hedge funds, banks and pension funds have poured capital into oil trading in recent years, betting that demand will increase. Analysts say these bets have become self-fulfilling prophesies, helping to push prices higher.”
It’s 2007 and it’s 1895 all over again!