Thursday, May 29, 2008
Double Trouble: Sovereign Wealth Funds and the Commodities Market, Why Oil Will Hit $200 a Barrel Before Year's End
Increased demand for oil from emerging economic powerhouses India and China? Tight refining capacity in the United States? Uncertainty in supply from oil producing countries like Nigeria, Sudan, Iraq and Venezuela? All of these factors play a role in shaping the sky high price of oil these days, but very few people are talking about the real culprits driving the frenzied greed that is the oil futures market: Sovereign Wealth Funds and to a lesser extent pension funds and other institutional investors.
Due to a cooling stock market and the pathetically weak dollar, OPEC countries are shifting their investments out of U.S. Treasury bills, bonds and the like and taking their windfall oil profits and putting them in managed funds called Sovereign Wealth Funds and buying up oil on the commodity futures markets for a double whammy effect on the world oil market that makes old man Rockefeller and the Standard Oil Monopolies of yore look like honest businesses. While refusing to increase capacity on the production end, and at the same time artificially driving the futures market in oil through the roof on the other end, it is no wonder that Goldman Sachs is predicting $200 a barrel oil by years end. See "Tighter U.S. commodity trading laws may be boon to foreign exchanges", By Isabelle Clary http://www.pionline.com/apps/pbcs.dll/article?AID=/20080528/REG/62860923/1008 and "Sovereign Wealth Funds A King's Ransom?" by Christopher Owen http://www.cnbceb.com/Articles/2008/May/42/sovereign-wealth-funds.aspx
What can we do about this unfair manipulation of the market? Regulations including prohibiting big institutional investors, especially Sovereign Wealth Funds from investing in the futures market? Unfortunately, it may not work. Dubai is rushing ahead with the start up of its own energy futures market most likely since they can see the writing on the wall and some, including the U.S. Senate are finally beginning to pay attention. Therefore if the U.S. and other Western financial markets tighten their regulations to reduce the unfair manipulation of the markets, the OPEC countries and other unethical money managers will simply pull out of the regulated markets causing a liquidity crisis in the U.S. and other responsible financial markets.
The solution has to be international cooperation and pressure to reach an agreement among all financial markets that everyone must play by the rules. I am sure that some of these same countries that are shaking us down with their monopolistic manipulations of the oil market would be the first to whine and howl if the food surplus producing countries played the same dishonest games in say the futures market for grains and livestock. While I do not advocate food as a weapon, the OPEC countries like the Republicans in this country have to understand that if you crush the middle class around the world and bring on a world wide depression, we all lose.