Stop Blaming the Speculators

Most commentaries about the rise in commodities prices are more interested in assigning blame to speculators, US alternative fuels policy or on the growth of China and India and the pressure on supply. I see much less in terms of the apposite responses that corporations, households and governments in terms of pubic policy.

Two articles here and here by David Koenig and Robert Samuelson respectively are taking the discussion forward by reporting on different aspects of the issue. To start with Koenig's piece in Business Week shows how the more astute managers of Southwest Airlines took to hedging against the volatility in prices of fuel by hedging intelligently. The idea behind this is quite clear because it proves that an understanding of the underlying economics and cost structure for running an airline would identify the idea of fuel price volatility as a major risk area. As the report states, they are not only far ahead of the competition in this approach but also that they paid US$ 1.89 per gallon of fuel whereas their competitors are paying in the US$ 2.73-2.83 range. To my mind, it demonstrates the fact that airlines need not be protected or offered public finances to make profits because the right advise should ensure that more of them utilize such financial instruments.

On the other hand, Robert Samuelson is justifiably animated that the correct analysis fr the rise of prices is being forgotten for the purpose of political convenience. Speculators are a convenient excuse for the rise in prices and so both presidential candidates are busy trying to impress the public with regulatory proposals ostensibly meant to reduce the adverse effects from speculation in commodities. This is in spite of the fact that the reason for the rise in commodity prices is clearly about the dynamics of supply and demand. This does seem to be an unduly simple answer for the political season when voters can demand to have their cake and eat it too.