A world damned by speculation

By Debasish Roy Chowdhury

BEIJING, July 11 -- "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.

(Source: China Daily)