Monday, June 30, 2008

Paul Krugman Has Two Words: Iron Ore

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.

You see, iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year (see chart above,
data here). In particular, the price Chinese steel makers pay to Australian mines has just jumped 96%. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

~Paul Krugman, NY Times article "Fuels on the Hill"

See related CD post on onions, which are also not traded in futures markets.

27 Comments:

At 6/30/2008 9:01 AM, Blogger Sophist said...

Why does Krugman discount the possibility that it is a speculative rise in oil prices that has caused the recent rise, or recent momentum, in prices of other commodities as well?

When energy costs go up, everything else goes up by some proportionality factor. It takes energy to produce, process, transport.

I have two words for Paul Krugman: Non Fingo

 
At 6/30/2008 9:02 AM, Blogger Marko said...

Couldn't this be "speculation" by consumers grabbing as much ore as they can on the belief (correct or not) that there will be a shortage in the future? Or hoarding by the Chinese government to create a strategic stockpile? Just because it is consumers, doesn't mean it isn't driven by "speculative" factors, or non-supply and demand factors. That additional growth may not materialize. Command economies (like China's still is, to a large extent) tend to get these things wrong.

This would still be going up if there was a bubble - which I think (and hope) it is.

 
At 6/30/2008 10:59 AM, Anonymous Anonymous said...

This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

Bullfeathers.

Weak Dollar and US Petroleum Reserves Behind Strong Oil Price

 
At 6/30/2008 11:17 AM, Anonymous Fred said...

Dear Bullfeathers,

From the article you cite:

"In addition, global economic activity and the demand for crude oil have been strong since 2003. This has been accompanied by weaker growth rates on the supply side of the oil market. In consequence, excess capacity has declined. These smaller margins of safety and the fact that a large share of global oil production occurs in politically unstable regions result in larger risk premiums that contribute to higher oil prices."

 
At 6/30/2008 11:48 AM, Blogger matt said...

Sophist: Non Fingo? Um, I'm rough on my old Latin, but I think you know not what that means.

There is a qualitative way to track Krugman's assertions. In fact, all data I've seen supports an overall rise in commodity demand across the board.

The question remains, as I posed to you on this blog last week, is whether or not demand is faked or delivery is being taken and hoarded. I remain skeptical that there is surplus inventory.

 
At 6/30/2008 12:19 PM, Anonymous Anonymous said...

What would cause such a dramatic increase over the short term? Even considering demand from emerging markets- wouldn't that demand be gradually increasing, not a huge spike at once?

 
At 6/30/2008 12:45 PM, Blogger randian said...

Why isn't ore traded globally?

 
At 6/30/2008 12:54 PM, Blogger bobble said...

"This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included."

ok, i believe you. so how do you globalization groupies propose i tackle the problem of food/resource inflation?

i know, i know, if the evil regulators would just get out of the way it would all work like a fine swiss watch. but lets be realistic, that won't happen

so in the meantime: my income has been cut in half by H1B wage arbitrage. i tried to make up for it by buying a big screen tv from walmart, but the savings from that purchase have been decimated up by gasoline and bread prices.

meanwhile college tuition and mortgage payments are chewing up my savings.

where is MY prosperity? does globalization reserve that for third world countries, ceo's, and hedge fund managers?

 
At 6/30/2008 1:04 PM, Blogger Sophist said...

Matt said (amongst other things... "In fact, all data I've seen supports an overall rise in commodity demand across the board."

No objection to that. Show us now your quantitative model that supports and the fast price rise.

Oh, you got none. You are just one of those who think "qualitatively".

"There is a qualitative way to track Krugman's assertions."

Sorry, the subject is too important to treat it "qualitatively".

"Sophist: Non Fingo? Um, I'm rough on my old Latin, but I think you know not what that means."

Maybe you are also rough on the qualitative economics you studied.

 
At 6/30/2008 1:14 PM, Blogger Sophist said...

bobble:

it is quite clear to many people who have working knowledge of how financial markets work (economists know little about that) that hedge funds have played a critical role in the recent rise in commodity prices and inflation.

First, I will tell you that all these funds more or less follow the same investment strategies. This is one cause of the bubble. They all go either long or short markets. Their objective is to make the rich richer. This is accomplished by making the poor poorer and by destroying middle class.

The financial market structure offers the tools to those funds to create any type of chaos they want and act as vehicles for income redistribution.

A good portion of what you pay today for gas and food is the profit of those hedge funds. They are unregulated and can do almost anything they want.

A lot of people think that by supporting this system of anarcho-capitalism/speculation they support free economy. They only thing they will accomplish is to strengthen socialist movements accross the globe and the eventual death of free market economy.

Free markets must have rules. Unfortunately, some think they shouldn't.

 
At 6/30/2008 1:48 PM, Blogger Marko said...

bobble, if you don't make enough money, try making more. Don't blame other people if you aren't making as much money as you want - it is up to you.

 
At 6/30/2008 1:48 PM, Blogger Gregory said...

Has the U.S. Navy yet decided to recycle its fleet of unused ships? The steel contained there-in must fetch a high price nowadays.

 
At 6/30/2008 2:15 PM, Anonymous Anonymous said...

Krugman is correct that supply and demand are causing price increases, but the US government is the main problem. The US has three major problems: 1) the federal deficit, 2)the trade deficit, 3)consumer debt. There is no "speculative" influence. The futures market is where price discovery occurs. This price discovery occurs based upon the current supply and demand.

 
At 6/30/2008 2:25 PM, Blogger Sophist said...

TO MP:

Maybe it is a good practice to also display some statements from people who actually trade commodities:

"Commodities advanced this year during a ``buying orgy'' by investors seeking better returns than stocks and bonds, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, said in March. "

"buying orgy" is a strong statement from a market professional.

Link

 
At 6/30/2008 2:36 PM, Blogger juandos said...

"A good portion of what you pay today for gas and food is the profit of those hedge funds. They are unregulated and can do almost anything they want"...

Hmmm, and you know this how sophist?

Do you have some credible sources for that?

"No objection to that. Show us now your quantitative model that supports and the fast price rise"...

Come, come sophist, the link anon will work for you too... BTW there is more on the CATO site that might help you out assuming you really do want the information in the first place...

"What would cause such a dramatic increase over the short term? Even considering demand from emerging markets- wouldn't that demand be gradually increasing, not a huge spike at once?"...

Didn't you read that other anon's link to Steve Hanke's commentary?

Every commodity trader knows that all commodities trade off changes in the value of the greenback. When the value of the dollar falls, the nominal dollar prices of internationally traded commodities, like gold, rice, and oil, must increase because more dollars are required to purchase the same quantity of any commodity. Accordingly, a weak dollar should signal higher commodity prices. And it does

"so how do you globalization groupies propose i tackle the problem of food/resource inflation?"...

Well bobble get another job or try to ride this out... Please don't whine about it...


CARPE DIEM

 
At 6/30/2008 2:39 PM, Anonymous Anonymous said...

Without markets to determine prices, volatility would be even more dramatic. The government is failing by not having an energy plan. Petro prices would fall immediately if the world though the US was serious about energy independence.

 
At 6/30/2008 2:45 PM, Blogger bobble said...

marko:"Don't blame other people if you aren't making as much money as you want - it is up to you."

LOL. apparently marko is just back from a real estate sales motivational seminar. go get 'em tiger.

i've always made plenty of money. though lately, not as much as i'm used to. i'm going to retire in a few years, and i'll get by very well.

apparently my point was not well communicated. i'm trying to point out, humorously, that for, the majority of middle class americans, globalization is not bringing them the *opportunities* to prosper that were promised when all the trade agreements were signed by the clintons, et al.

you know, the great *high paying* new jobs that were going to replace the ones lost to the third world haven't materialized. the economic structure is not working so well for the middle class, and cheap crap from walmart doesn't ameliorate that. and now resource shortages have made it all worse. it's just a stinking pile of crap.

i know it can't be changed or stopped. i'm just pointing out, for some of the disciples here, that the theory does not match the reality.

 
At 6/30/2008 2:53 PM, Blogger Sophist said...

Jandos, the inflation proof blogger, asked:

"Hmmm, and you know this how sophist?"

"Do you have some credible sources for that?"

nothing can help you to understand anything unless you are willing to accept the falsity of your position.

I provided a link above. Commodity buying orgy from hedfe funds.

If you need further proof, I'm sorry, no human can provide it to you, you need to pray to God.

 
At 6/30/2008 3:05 PM, Blogger juandos said...

Well thank you sophist for proving yet again you have no idea what you are blathering on about and your grip on reality is tenuous at best: "nothing can help you to understand anything unless you are willing to accept the falsity of your position"...

No sophist, the link you provide is from the ever questionable Bloomberg alledging to have quoted various individuals and guess what? The words, "hedfe funds" do not appear in the Bloomberg story...

I'm guessing you meant to say, "hedge funds", right?

Do you want to try again?

Here's one for you sophist, tell me the difference between someone buy stock for his/her portfolio and a hedge fund trader...

This ought to be interesting...

 
At 6/30/2008 3:10 PM, Anonymous Anonymous said...

The Federal Reserve is also screwing us by undercutting market interest rates. They can control the economy just as much as the Legislative and Executive Branches but we can't vote them out of office when they do a crappy job!

 
At 6/30/2008 11:56 PM, Anonymous Anonymous said...

Juandos man, pretty soon your libertarian supported speculators will leave you with no money to pay for an internet connection. Of course, nobody will miss your nonsense.

 
At 7/01/2008 12:16 AM, Anonymous Anonymous said...

Time for an excess profits tax on iron ore...

 
At 7/01/2008 1:41 AM, Blogger OBloodyHell said...

> I have two words for Paul Krugman

Oh, my. The mind just boggles at all the possibilities.

 
At 7/01/2008 1:51 AM, Blogger OBloodyHell said...

> What would cause such a dramatic increase over the short term? Even considering demand from emerging markets- wouldn't that demand be gradually increasing, not a huge spike at once?

The general argument you find, I believe, is that fungible commodities tend towards instantaneous price rises. Although an actual barrel of oil may be in the processing pipeline for a period of time (weeks, perhaps, from drawing it out of the ground, to pumping it into your car) a rise in the price of a barrel of oil today will cause a rise in the price at the pump today as well -- even though nominally, the price paid for that barrel was the old price.

The converse is true, too -- if the price goes down, you can get stuck with less profit, or even a loss, from the inventory you bought.

A) This ties to one of the arguments in favor of futures contracts.

b) I don't claim to be able to recite the reason why the market behavior of such commodities is what it is. I've heard it before, and followed it at the time (and grasped the sense of it), but the argument isn't coming back to me. (It might be a good thing for someone to explain, IIRC, it's one of the more radily understood of those counter-intuitive elements of economics where "common sense" breaks down).

 
At 7/01/2008 2:00 AM, Blogger OBloodyHell said...

> i know, i know, if the evil regulators would just get out of the way it would all work like a fine swiss watch. but lets be realistic, that won't happen

bobbie,
a) "it would all work like a fine swiss watch" -- It will happen, and does all the time. There is certainly some pain while the gears grind a little, but it'll fix itself, it just works that way. The best attitude to take is that of Geoffrey Rush in Shakespeare in Love:
Philip Henslowe: Mr. Fennyman, allow me to explain about the theatre business. The natural condition is one of insurmountable obstacles on the road to imminent disaster.
Hugh Fennyman: So what do we do?
Philip Henslowe: Nothing. Strangely enough, it all turns out well.
Hugh Fennyman: How?
Philip Henslowe: I don't know. It's a mystery.


b) the only thing those regulators can do, really, is f*** it up even more. The only thing that price controls in the 70s did was to keep prices screwed up for even longer. The only thing the bank regulation did in the 30s was to take a bunch of localized problems and make them nationwide. The government took a bad worldwide economic downturn and made it into the worst depression in the history of mankind. I think they are starting to get a bit of a clue about how the Money Supply works. We've had several opportunities to recreate the Great Depression in the last 25 years, and managed to not repeat that idiocy. But that's just one component of a much larger system we have no clue about.

 
At 7/01/2008 2:16 AM, Blogger OBloodyHell said...

> where is MY prosperity? does globalization reserve that for third world countries, ceo's, and hedge fund managers?

bobbie. Long View. It's not easy, but a short-term downturn does not a life ruin make.

1) The world doesn't owe you anything. It was here first

2) You live in a country where people are constantly shuttling between income groups. up, down, and back and forth. Realize that the longer your life is, the more you're going to shuttle yourself.

3) Recognize that the real trick to it all is to realize that income-producing assets are the long term goal, if you want to be wealthy. Not gewgaws like TVs and Boats and Ferarris, but things that actually make money FOR you.

4) Compound interest is your greatest friend possible. Find a compound interest calculator (the internet is riddled) and see how much money you will have if you can put away just $100 a month, starting NOW, and get about 8% interest on it (very doable), and keep doing that for 20 years. Do it for 30 (easy -- if you're 25, that 30 years means you're 55... not even classical "retirement" age) and you'll REALLY boggle at the numbers. Boost that a bit more when you get a bit older and have more income (say, double the amount every 5 years) and again the numbers will shoot up. And, over time, it's very easy to average 8%/year long-term.

5) Realize that, sometimes, you have to put off immediate gratification for long-term benefit. Buy a good, solid used car and put the money saved into assets, rather than buy a brand new car. Pay off that car quickly, and then drive it for a couple years (while still "making payments" into your assets accounts).

6) One thing I've noticed about people at the top -- they tend to be workaholics. They make 100k/year because they work 60 and 70 and 80 hour weeks, regularly. If you don't choose to do that (I certainly don't) then realize you aren't going to get one of those top-level incomes (I think that the choice is a good one, but that is for you to make).

 
At 7/01/2008 4:09 PM, Blogger juandos said...

"Juandos man, pretty soon your libertarian supported speculators will leave you with no money to pay for an internet connection. Of course, nobody will miss your nonsense"....

Oh dear! A LIBTARD with hurt feelings and an empty headed agenda...

Can life be sweeter?!?!...

Oh BTW anon @ 11:56 PM, I'm not a libertarian but maybe I shouldn't bore you with the FACTS since they seem to be ever so bothersome to you...

Can you accept my apologies?...ROFLMAO!

 

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