Some of my readers are aware that I have argued on Capitol Hill for better regulation of the commodity markets. In my opinion (sadly, far from mainstream), commodity prices were distorted by the tidal wave of investment capital flowing into these markets. The rapid collapse in global commodity prices is, to my mind, some vindication of my belief that prices were artificially supported — that’s the good news. The bad news is that the price decline, particularly in oil, has pushed the “regulation of speculation” debate to the back burner. However, it is very important that the excessive non-commercial demand for commodities receive scrutiny, not just because it may again disrupt markets in the future, but also because we may have drawn false conclusions from last summer’s distorted markets.
One such conclusion, now questionable, was that the spectacular rise in grain prices was due to bio-fuel production demand (ethanol). Bio-fuels became demonized as having driven food inflation and even starvation. However, it may well be that “investment” demand for commodities was an even more overwhelming factor than I imagined. Advocates of bio-fuels have begun to take up the argument that overspeculation in the commodity markets was the culprit. A few examples can be found here and here.
I have no opinion on the efficacy of bio-fuels (I gather that there is evidence to the contrary), but I do think that, if we are to lessen our dependence on the Middle East and Russia’s oil reserves, we need to hold a fair debate on the alternatives. Failing to recognize the impact of overspeculation means a discussion on the genuine merits cannot occur. My own testimony before the House Agriculture Committee can be found on the House website.