Speculators Are Causing the Cost of Living to Skyrocket -- Part 1

THE ATTACK ON PROSPERITY

How Speculators Are Causing the Cost of Living to Skyrocket

SPIEGEL ONLINE

Spiegal ( Germany )

June 13, 2008

http://www.spiegel.de/international/world/0,1518,559550,00.html

After investing in high-tech stocks and real estate loans for years, legions of speculators have now

discovered commodities like oil and gas, wheat and rice. Their billions are pushing prices up to

astronomical levels -- with serious consequences for ordinary people's quality of life and the global

economy.

Daniel Jaeggi is sitting at a conference table in an office building on Place du Molard in Geneva, only a few steps away from the lake. It is 1:45 p.m. on Friday of last week, and the price of a barrel of the

benchmark Brent Crude oil is at $129.50 (Eur 82).

Jaeggi, a 47-year-old Swiss citizen, is a petroleum trader. He and his partner, Marco Dunand, own a company called Mercuria. It is one of the world's 10 largest trading companies. At its offices in Geneva , approximately 110 employees analyze markets, handle contracts and track tanker routes. Last year Mercuria traded in petroleum products worth a total of almost $30 billion (Eur 19 billion). That included millions of barrels of oil destined for China .

"For decades, oil was too cheap. Until 1999, a barrel went for less than $10 (Eur 6.40)," says Jaeggi. Of course, rising economies like China , India , Russia and Brazil have stimulated demand, driving up the price of oil. But what really changed the market were the big pension and investment funds.

Searching for secure and long-term returns, major investors turned their attention to the commodities

indexes, investments that promised substantially higher returns than investing in the stock market. The more the funds invested, the higher the prices went, especially since the market for speculative commodities securities is very small. Even minor shifts in the portfolios of large mutual funds can quickly drive up the price of oil.

At 3:15 p.m., the price of a barrel of Brent Crude is at $131 (Eur 83). During the course of the day, traders at Mercuria in Geneva trade up to 4 million barrels of "real" oil and about 10 times as much in so-called swaps -- in other words, oil which only exists on paper -- to hedge against risk.

"The oil price has gone up by about $10 in the last two days," says Jaeggi, adding that in the past it would have taken the market years to achieve the same price increase. Later on Friday, US crude would hit a record price of over $139, up $11 in the largest-ever single day increase.

Last August, the price of oil was $70 (Eur 45) a barrel, in early March it surpassed the $100 (Eur 64) mark, and then the new record high on June 6. What's next?

To be continued