Commodities

In July of 2008 the price of oil soared above $145 per barrel. Throughout the months long price increase that led to this pinnacle in the price of oil the media tried to make it look like oil companies were price gouging and citizens were demanding that something be done. Senator Hillary Clinton (NY-D) among other politicians at the time called for over-bearing legislation such as a windfall profits tax to appease the populist outrage.

Although Democrats did not get their wish and pass harmful legislation, this is an example of the typical reaction from politicians that continues the cycle of destruction that is caused by the unintended consequences of their original legislation in the first place. People lack accountability, politicians feel pressured to "do something," new overbearing legislation is caked on top of the other unnecessary production-inhibiting legislation.

Why did we have oil prices reach that height in the first place? One needs look no further than the unintended consequences of our politicians in Congress. Congressmen would like nothing more than to stay in office. Who could refuse the power (the kind that allows you to snuff your enemies), influence, and amazing perks, i.e. tax exemption, health insurance fit for kings, etc? This is why politicians succumb to the influence of their "constituents;" the kind that provide "bundling," the kind that can afford powerful lobbyists, the kind that require something in return for their support.

One such powerful group of constituents is the corn lobby; the lobby that was behind the bright idea to convert corn into ethanol, known as E85. They along with politicians packaged the idea to look like an environmentally friendly and pro-American solution to our fuel needs. They would mandate that gasoline providers must have a small percentage of each gallon of gasoline contain corn ethanol; therefore, creating an artificial market for that inefficient bio-fuel for the purpose of appeasing corn farmers and their lobby, in essence, paying for votes.

The consequence of this small action combined with other factors resulted in a plethora of devastating consequences. Last year there was a worldwide drought. Subsistence as well as commercial farmers in other countries were unable to grow crops which caused a shortage in commodities around the globe.

When Congress coercively mandated that gasoline station sell ethanol that action led to artificially driving up the price even more, as well as an incentive for farmers, who would otherwise grow other agricultural commodities like wheat, maize, cotton, etc., to grow corn instead. This corn would be used for non-food consumption.

The fact that the U.S. feeds a significant portion of the world literally had a deadly effect on people in other countries when they could no longer afford to purchase food because of the dramatic artificial price increase. Moreover, Congress put tariffs on foreign bio-fuels and other food commodities exacerbating the increase even more.

Oil, as a commodity, would naturally rise, but why so disproportionately? When people perceive inflation they convert their dollars into physical assets which tend to hold value constant against a decreasing dollar. Some analysts believed that investors perceived inflation coming and instead of purchasing real estate or gold to preserve their wealth against inflation they sought to preserve it by storing it in oil contracts, a way to hedge.

Also, it should be noted that people in the "BRIC" countries have growing economies and increased wealth which translates into an increased demand and taste for larger food portions, more variety, and richer foods. There is no doubt that the increased global demand put even more pressure.

Finally, there was the perception that "evil speculators" were behind the dramatic spike. Speculators thought the price would increase forever. The fact of the matter is that there is peak oil, which I won't discuss in this post, but the price should at least be double the high back in July of 2008. However, the accurate price is the equilibrium price the participants in the market are willing to buy and sell uninhibited by the government.

All these events, whether perceived or actual, contribute to an increase in the price of oil as well as commodity prices in general. Where does the blame lie? The bureaucrats in Washington. Although local politicians screw stuff up too they do not do it to the magnitude that federal bureaucrats do.

We can learn so much from our recent history. Some wish to ignore these and other events as inconsequential. The smart money has realized for the last decade that there has been a shift; a shift that is still in motion, from paper products to commodities and other asset classes.

There are several asset classes: paper product such as equities and bonds; and hard assets, such as real estate, commodities, and currencies. Wall Street has ignored everything except paper products. They stand to profit from the bonuses and fees they receive through underwriting, brokering, and disseminating these paper products into the primary market.

There is no wonder the powerful elites on Wall Street stand in the way of approving college text books that teach about products other than paper. You find little mention in these books about the other more important asset classes.

However, soon commodities will skyrocket and there will be a shift, not entirely, away from the paper products and the shufflers on Wall Street to the other classes, which after all, encompass the majority of our lives. This in spite of the naysayers who believe the commodity super-cycle has come and gone.

We will see food prices increase permanently higher. In the short-run they will continue to fluctuate. Become a farmer. Buy equities if you must, but make sure they are non-Dollar denominated commodity based stocks. Start a business. Buy real estate. Buy precious metals. Food prices, and all other commodities, including oil, will continue to increase as long as the government keeps meddling in the economy. Be invested in them.