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Monday 1 December 2008

Are markets becoming part of the problem?

Martin Vander Weyer wonders whether 'City spivs' are responsible for the current economic turbulence.

Symbolic of all this is Richie Arens, the hitherto-unknown local (that is, one-man band) trader on the New York Mercantile Exchange who celebrated the New Year by bidding $100 a barrel for 1,000 barrels of crude oil, thus losing himself $600 on the day while seeing his name in lights all over the world as the first person to pay the historic three-digit price. The fact that oil has tripled in price in the past four years is, as every schoolboy knows, a reflection of soaring energy demand from China and India, political uncertainty in the Middle East, and a failure on the part of oil-producing countries and multi-national companies either to invest sufficiently in new production and refining facilities or simply to open the taps when politely asked to do so by their customers. But those real-world factors have not altered the supply-demand balance in such a way as to cause the price to multiply by three: speculators – from giant hedge funds to tiny day-traders like Mr Arens – have done that, by chasing the ‘oil-up’ story, via all manner of instruments and traded funds and derivatives, as hard as they can.

Apparently the post-industrial west is now so much more efficient in its use of energy that $100 oil is not an instant signal for recession, as its inflation-adjusted equivalent would have been 25 or 30 years ago. What’s more, optimists and environmentalists (usually to be found in opposite corners) agree that higher prices for fossil fuels can be a good thing if they promote greater interest and faster investment in clean, renewable energy technologies. But however we search for the bright side of $100 oil, it clearly carries huge negatives: inflation in domestic fuel and heating costs with knock-on effects in all other areas of consumer spending, a radical change in the economics of any business for which transport costs are an important factor, a giant transfer of wealth to some of the most unpalatable regimes in Africa and the Middle East.

Oil is just one of many examples in which, I fear, the market itself is becoming more of a problem than a solution. Perhaps ‘City spiv’ has too harsh a connotation, but the over-sophisticated, over-confident City trader, so pleased with his power to move prices that, like Mr Arens in New York, he does so at will, just to see what they look like on the screen, is as dangerous as any egomaniac politician or crazed jihadist.

Did my banker friend agree? ‘Oh no,’ he replied smoothly, ‘You fellows always blame the City just for doing its job so well. And frankly, we always blame you journalists.’   

More articles from: Martin Vander Weyer | this section

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