A new middle class - the other commodities story: Share prices have surged in recent years for agriculture, metals and energy companies, and traders betting long on the commodities sold by these companies have been rewarded richly as well. Now the Wall Street Journal finds a far more dramatic impact across borders -- Eric Bellman reports that the boom in palm oil (seeds pictured above), cocoa, rubber, coal and more has created a new or larger middle class in countries like Brazil, Indonesia, Malaysia and Thailand. In Indonesia, writes Bellman, "rubber tappers, cocoa pickers, coal miners and other rural laborers have in some cases seen their incomes more than triple in the last three years, making the workers' wealthier than some city residents and putting them on the radar of such multinational consumer-goods makers as Honda Motor Co. and Unilever." Of course, if you are not engaged in palm-oil farming or other commodities businesses, you are probably hurting with high prices. The palm oil boom has also caused deforestation in Indonesia. But Bellman quotes figures from the Asian Development Bank that from 1999 to 2009, Indonesia's middle class doubled to 93 million people, or 40 percent of the population of 229 million people.
The trouble in Greenland: Shell has gotten provisional approval to drill for oil offshore from Alaska's North Slope in the Arctic Ocean. After five years and $4 billion in spending, Shell is pretty thrilled. Oil booms can be exciting, but there is something other-worldly about the hoopla surrounding the Arctic, which every large oil company on the planet, not to mention the leaders of a few states such as Russia, appears unabashedly eager to develop as the next big frontier. The ice-melting impact of global warming is opening up the Arctic Circle, the location of 25 percent of the world's remaining oil and gas reserves, according to the U.S. Geological Survey. But earlier this week, we got a reminder that the arrival of a sloshy ice pack doesn't make this forbidding region easy to work in. Cairn Energy, which had already faced creatively angry activists from Greenpeace, says it is abandoning a dry hole it has drilled on Greenland's west coast, one of four wells costing $600 million that the British company plans in the country. The company says it's going ahead with the other wells. ExxonMobil, Chevron and Encana Corp. also hold drilling licenses there. As for Shell and Alaska, this is just the first major hurdle.
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Oil price spiral, interrupted: Rex Tillerson, the CEO of ExxonMobil, said this week that the purely economic value of oil is $60-$70 a barrel, or about 29 percent lower than the price at which it closed Friday. Tillerson (pictured at right above) was talking about the cost of producing new crude oil, not the stuff that is already in tankers headed to refineries or in storage. You'd add reasonable profit on top of Tillerson's estimate, but he doesn't claim that this explains the divergence of the price to above $100 a barrel in the last couple of months. He is mystified along with the rest of us.
He was speaking at a Senate Finance Committee hearing that was just one tick in a highly newsy week in oil. The CME Group, which owns the Nymex exchange where speculators trade U.S. oil futures, took some air out of the market by significantly raising the cost to bet on oil -- by a whopping 25 percent (while that's a lot, it's nothing compared with an 84 percent increase this week in the price for betting on silver). Why did CME act? One reason is that speculators are pushing the oil price all over the place. Traders became so overheated Wednesday, for example, that CME actually called a temporary halt to the betting action.
One factor that's played havoc with the market has been two years of government stimulus. Governments around the world -- in Europe, Asia and the United States -- have so feared a catastrophic and prolonged depression that they have lavished public spending on their economies, and maintained super-low interest rates. The U.S. Federal Reserve has even engaged a trick called quantitative easing, which does the same thing as stimulus by putting more cash into the system. All this money staved off the worst for a while, but it had to go someplace, and guess where that is? A lot of it has become "hot money," sizzling up developing markets around the world -- and commodities such as oil. To make things much simpler, the money has gotten into the hands of traders, who have driven up the price of oil (among other commodities including silver). Don't ask me how specifically it got into their hands; that's one of the tricks of speculator types -- they somehow, in every period of economic bubbles, end up at the delivery end of cash faucets.
What importantly isn't often taken account of is that robotic traders are sitting right next to the live players at the casino. These really are robots -- not the kind with artificial intelligence that futurist Ray Kurzweil forecasts will take over our lives in a few short decades, but computerized traders: robotic robots that automatically buy or sell when certain price thresholds are crossed. That was the major cause of the huge price dives over the last 10 days or so. As Reuters reports, there was a perfect storm, and the robots went wild.
As a coda, I have often wondered why this type of what I think is fairly sensible talk makes some people uncomfortable, and I think I've discovered why -- they think that if you point out the role of speculators, you are calling for their abolition. But why would that be so? If one suggested for example that the presence of wild quantities of trout results in a spurt in the issuance of fishing licenses, would you fear the eradication of fishing? I think the speculation deniers should relax. We all know that trading (speculation) has a healthy function in markets. Yet we also know that it can move markets. It is the latter factor that is under discussion.
For those who want it from the horse's mouth, here is a video of Tillerson at Thursday's Senate hearing.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.