Greed, Blame, and Four-Dollar Gasoline

by | Jul 4, 2008 | Weekly Column

gas-prices.jpgYou know gas prices are soaring. What you may not know is why.

As with most problems, there are no easy answers or quick solutions. Yet in our society, we don’t want to hear that. We want easy answers and quick solutions.

Pandering politicians and the sensationalists in the media are quick to give us what we want—someone to blame and a quick fix for the oil problem. The blame? Greedy speculators. The fix? More regulation.

Recent headlines read: “Obama Vows Crackdown on Oil Speculators” and “McCain Calls for Federal Probe on Oil Speculation.” Even Fox’s Bill O’Reilly has called for the regulation of the evil oil speculators who are hurting “the folks.”

In recent months, I’ve wondered exactly who are these greedy and evil oil speculators who are single-handedly driving up oil prices. It finally dawned on me who Obama, McCain, and O’Reilly are referring to. These evil speculators are my clients!

Yes, it’s Dewayne, a retired banker who will turn 100 this year. It’s also Mary, widowed five years ago when her husband died suddenly of a heart attack. And don’t forget Brandon, who’s a senior at MIT. They, and 65 more of my clients, are the “speculators”pig.jpg these pundits are blaming for our crippling energy prices.

How did these ordinary Americans turn to the dark side? They added a commodities index mutual fund to their investment portfolios. I began advising my clients to do this in 1998, long before commodity index funds became popular. These funds, just like stock and bond index funds, are a simple and low-risk way for an investor to gain a diversified exposure to an asset class. The most popular index for stocks is the S&P 500, for bonds it’s the Lehman US Aggregate Bond Index, and for commodities it’s the Goldman Sachs Commodities Index (GSCI).

The argument used to blame these investors for high oil prices is this: commodity prices have soared over the same time that investment in commodity index funds has swelled to 260 billion dollars. Therefore, the increase in commodity prices has been caused by the billions of dollars flowing into the commodity indexes.

It seems odd to me that such blame was never thrust upon the S&P Index in 1999 when stock prices were soaring out of sight. Neither were fingers pointed at those who invested in the Wilshire Real Estate Investment Trust (REIT) index as the cause of the real estate bubble. Even more interesting is that not all of the commodities in the GSCI have increased. Why have the precious metals, oil, and agricultural sectors of the index risen, while livestock and industrial metals have been flat or trending lower over the past year?

Rather than focus the blame on Dewayne, Mary, and Brandon, maybe we could blame rising inflation, artificially low interest rates, a weak national currency, peak oil, supply and demand, and a failed national energy policy as possible influences on our out-of-control energy prices.

Just as most investors came late to the party in 1999 when the stock market peaked and in 2006 when real estate prices spiked, the same will happen with commodities. In the last year or so, as commodity prices spiraled upward, investors who chase returns (I call them timers) began putting more and more money into the commodity indexes. Chances are they’ve come to the party just as it is winding down.

Predictably, these “speculators” (who are nothing more than people trying to time the market) will lose their shirts, just as they did on stocks in 2000 and real estate in 2006. The only thing different about this bubble is that this time it is commodities.

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