Speculators ‘R’ Us: The G8 and Energy Prices

The G8 summit was obviously disappointing, even for those with low expectations.  Usually, the substance is lacking but the public relations are well managed.  This year even the messaging was messed up – they said some new things on climate change but not what we were told they could say, the food aid/development package was lamer than advertized, etc.  So the whole thing looks like an expensive flop.

But actually it was much worse.

I’ve written elsewhere this week about the G8’s broad decline in legitimacy and appeal relative to the G20 , and the specific pressing issue of cross-border resolution authority for failed banks – which is a matter of pressing urgency, yet not something taken up in or around this summit.

Think now about the macro/financial angle.  Writing in the WSJ on Wednesday, Gordon Brown and Nicolas Sarkozy argued that speculation in financial markets lies behind the fluctuations in oil prices.  The G8 went along with this message.

On any given Friday, I’m perfectly willing to believe that there are either specific manipulations or broader structural issues with regard to trading in oil futures.  I welcome the CFTC’s moves to (finally) regulate markets more effectively.

But, more generally, the G8 – and its members this week – are disingenuous when they speak about energy prices, in three ways.

1) They are trying hard to talk up the market, with regard to global growth.  At the same time, the hard data continue to disappoint.  Naturally, this causes volatility in oil prices.

2) They claim to see no link between their failure to converge on climate change/environmental policies and what happens to energy prices.  The extent to which industrialized countries’ effectively control carbon emissions will have a big impact on the longer-run demand for oil.  Flip-flopping on this issue discourages investment in the energy sector (regular and alternative), and thus directly and indirectly contributes to oil price volatility.

3) The very cheap money policies of leading central banks, including the Fed, the Bank of England and arguably also the European Central Bank, lower the funding costs for big players who want to take large positions in commodities markets.  Essentially, we are providing the credit that makes big speculative positions possible.  Add to this mix a “too big to fail” attitude and a “yes we can, recapitalize through trading profits” deal with policymakers, and you see why major financial firms are likely to place huge commodity bets in the months ahead.

The G8, separately and jointly, destabilizes energy prices and refuses to even talk about this reality – taking the view that being more candid would just upset consumer, business, and investor confidence.  They gamble, on energy and more broadly, that the road to recovery runs parallel with pretending there are no problems.

The true speculators here are your elected representatives.

About Simon Johnson 101 Articles

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of BaselineScenario.com, a widely cited website on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.

Mr. Johnson appears regularly on NPR's Planet Money podcast in the Economist House Calls feature, is a weekly contributor to NYT.com's Economix, and has a video blog feature on The New Republic's website. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-2009).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford.

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