The Commodities Markets are Absurd, Unstable, and Dangerous
For better or worse—and mostly worse—commodity prices have been in the news in 2022. In the United States, the price of gasoline reached historic highs in June, squeezing the already-depleted wallets of the nation’s working class. Across Europe, the cost of heating oil has skyrocketed, threatening millions with a miserable and potentially deadly winter. In Sri Lanka, the price of basic foodstuffs like vegetables and bread rose by 80 percent over the summer, leading to a series of mass demonstrations that forced President Gotabaya Rajapaksa to flee the country. Around the world, people are turning their fear and frustration at the cost of living into anger at particular politicians—whether it’s Rajapaksa, Joe Biden, the British Tories, or the leaders of Eastern European countries like Albania, where prices have been distorted by Putin’s war on Ukraine. But as the journalist and filmmaker Rupert Russell argues in his new book, Price Wars: How the Commodities Markets Made Our Chaotic World, the source of all this instability is something more fundamental than any single leader’s impact on the market. The problem, in many ways, is the market itself.
To understand the radical implications of Russell’s book, it might be useful to take a step back and examine the conventional wisdom on commodity prices. For the most part, this can be boiled down to something called the “efficient-market hypothesis.” Popularized by economists like Friedrich Hayek and Milton Friedman, this theory—which has become a dogma in Western economic institutions—claims that prices efficiently gather all the available information about the supply and demand of a given commodity and synthesize it into a single number. If an oil refinery blows up, for example, that information will quickly be absorbed by the market, and the price of oil will rise. On the other hand, if everyone suddenly decides that they hate eggplants, the price of eggplants will plummet. In this way, prices are supposed to coordinate economic activity, rewarding people who produce in-demand items with a higher payoff, and punishing those who produce something unwanted. Or, as Hayek succinctly put it in a 1978 interview, “the function of prices is to tell people what they ought to do” more effectively than central planning ever could.
At first glance, the efficient-market hypothesis seems reasonable enough, and it has fooled plenty of otherwise intelligent people over the years—so much so, in fact, that it now forms the cornerstone of the entire world economy. But as Price Wars reveals, the theory is actually riddled with fundamental flaws. One of the most glaring is the assumption that markets only assimilate correct information, and somehow filter out hearsay, rumor, wishful thinking, and other kinds of human foolishness. In case after case, Russell shows, this simply isn’t true.
For example, in June 2014 the price of crude oil spiked by 5 percent worldwide, reaching a peak of $115 per barrel (Russell’s numbers). This increase was triggered mainly by the military gains of ISIL, which captured the city of Mosul, Iraq on June 10—and by dire warnings in papers like the Financial Times, which claimed on June 20 that “a loss of Iraqi exports could add $40-$50 to crude price” in the event that ISIL conquered even more territory. However, the papers—and by extension, the commodities traders who read them—missed several important facts, which Russell takes pains to lay out. In the first place, Mosul isn’t a major center of oil production or refinement, so its capture alone wouldn’t cause a significant supply disruption. And in the second, ISIL’s military strategy was “built around recruiting disaffected Sunnis to fight a sectarian war,” making the predominantly-Sunni population of Mosul an unusually vulnerable target. Later, when ISIL attempted to push into majority Shiite and Kurdish areas, they “met far stiffer resistance,” and the onslaught prophesied by the Financial Times never came to pass. But even if it had, Russell argues, it’s unlikely that the global oil market would have faced serious shortages. After all, any regime that captures an oil field has a vested interest in keeping the oil flowing, whatever else their political or religious agenda might be. Otherwise, the prize is useless. By overlooking or ignoring these key facts, oil speculators left the realm of objective information behind, exchanging it for their subjective interpretation of world events—which turned out to be completely wrong. By December 2014, the bubble burst, and the price of crude oil plummeted to just $62, losing almost half its total value.
Already, we can see cracks in the economic orthodoxy beginning to form. If commodities markets are capable of producing outcomes this erroneous, they might not be so “efficient” after all. But incredibly, this case study of mid-2010s Iraq is actually one of the least absurd episodes in Price Wars. Things only accelerate, intensify, and get weirder from there, as Russell turns his attention to the global food crisis of 2007-08:
“Prices were not synthesising information across the global supply chains as they were supposed to. Instead, prices reached record highs right as supply was peaking—more food had been produced in 2008 than at any point in human history—and demand was falling as the global economy cratered. […] Something had gone deeply wrong with the ‘magic’ of the price system.”
One of the main culprits, Russell argues, was an influx of capital into index funds, futures, and other financial instruments, which caused commodity markets to gradually lose touch with physical reality.
In layman’s terms, a commodity index fund is one that spreads its users’ money across a list of companies—the “index”—that all trade in the same item, allowing speculators to invest in the entire spectrum of that commodity’s market rather than any single firm. A futures contract, meanwhile, commits the investor to buy X amount of a commodity at Y price, at a predetermined future date. The buyer makes money by betting that the actual price will rise above Y, and that Y will therefore become a bargain. (Or by selling at Y, betting that the price will fall.) In both cases, the transactions can be performed purely with digitized funds in a computer system, without anyone having to take possession of physical bushels of wheat, barrels of oil, or the like. (It’s doubtful that most speculators have ever seen a bushel of wheat, let alone lifted one.)
All of these financial instruments have been around for decades, but they saw a major surge in popularity in the wake of the 2000 stock market crash, as speculators in Wall Street and the City of London pulled their money out of struggling tech stocks, and invested it in commodities instead. A second, even greater surge followed in 2008, driven by “institutional investors searching for a safe haven as real estate cratered” in the wake of the subprime mortgage crisis. Unlike physical commodities, which are limited by the space available to store them, index funds and futures allowed speculators to pump nearly unlimited capital into the markets, to the point where speculative purchases vastly outnumbered purchases by people who actually wanted to eat vegetables or burn heating oil. This can all be a little counterintuitive, so Russell turns to metaphor to illustrate his point:
“Imagine a row of planets, each with a gravitational pull based on the real-world supply and demand of a commodity. Planet Nickel’s gravity is the result of the supply of nickel from nickel mines and the world’s demand for nickel. Planet Wheat’s gravity is determined by the amount of wheat harvested and how many people across the world want to buy it. The price of these commodities is each planet’s moon: it moves according to the gravity of each planet, that is to say the real-world supply and demand for it. Then another object appears, one many times the size of each individual planet. Let’s imagine it’s the sun. The sun’s gravity comes from the supply and demand of financial capital, and its size dwarfs every real-world market that it encounters. This sun passes by our commodity planets and tugs on their moons. The price-moons are drawn towards this larger gravitational field. They now orbit the sun. They may be moved by the planets occasionally, but the sun-mass of financial capital overwhelms.”
If anything, this is an understatement. From an estimated total of $13 billion in 2003, commodity index funds alone grew exponentially to $260 billion in 2006, an increase of roughly 2,000 percent. Not only was finance capital acting as a “sun,” it was practically a black hole. Instead of information about real-world production shaping the speculative markets, speculation began to determine the prices of real goods, causing dramatic spikes in cost even when there was no justification for them in either supply or demand.
It’s worth noting that commodity trading is one of the only sectors of the economy that works like this. It’s hard to imagine, for example, car dealerships pricing their 2022 offerings based on trades of hypothetical 2026 models that haven’t even been built yet. Most people would agree that a business model like that would be extremely silly, and it would probably also be illegal. And yet, somehow the most basic necessities of life—food, heat, building materials for homes—are subject to strange, volatile forms of finance that would be dismissed as ridiculous in other less-essential markets. How did this come to be?
On one level, it’s a language game. As Russell highlights throughout Price Wars, the world of financial speculation is a morass of jargon, technical terms, and legalese, to the point that the average person has little hope of understanding what’s going on in any given transaction. For reference, we can look at just one clause from a typical futures contract, presented as an example on the popular website Law Insider:
“The Parent will not, and will not permit any Subsidiary of the Parent to, enter into or be obligated under any contract for sale for future delivery of oil or gas (whether or not the subject oil or gas is to be delivered), hedging contract, forward contract, swap agreement, futures contract or other similar agreement except for (i) such contracts (x) which fall within the parameters set forth on Exhibit H hereto or are otherwise approved in writing by the Majority Banks and (y) which in the aggregate do not cover at any time a volume of oil and/or gas equal to or greater than 50% of the proved producing reserves attributable to the oil and gas properties of the Parent and its Subsidiaries, taken as a whole, as evidenced by the most current Engineering and Parent Reports and (ii) production sales contracts entered into in the ordinary course of the Parent’s or the applicable Subsidiary’s business.”
That, believe it or not, is one sentence, festooned with parentheticals, nesting clauses, ambiguous phrases, and assorted financial arcana. Any competent editor would take it out back and shoot it. And yet commodities futures, derivatives, and index funds often come with hundreds of pages of this kind of thing attached. They’re notorious for being “impenetrable even to seasoned financial professionals,” much less the actual farmers or miners who produce the commodities, or the people whose pensions or 401ks may be tied up in them. As Joseph Stiglitz, a Nobel-winning economist who Russell interviews, argues, the effect of these unnecessarily verbose contracts was “to obscure what was going on,” and to create “an instrument of non-transparency,” allowing ever-more-complex financialized trades, swaps, and reverse-swaps to hide behind a smokescreen as they accelerated throughout the 2000s. In this sense, translating the language of the speculators into ordinary English, as Russell attempts to do, is in itself a political act, which serves to dispel some of the “non-transparency” baked into the system.
But language alone isn’t enough to explain how we got here. Price Wars is also a story about politics, and a sustained campaign to deregulate and remove safeguards from the commodities markets over time. After all, the problem of an increasingly financialized market distorting prices is not a new one. It also arose in 1875, when futures contracts were relatively new toys for the speculating upper classes—and when on-paper purchases overtook real ones by an order of magnitude for the first time, totaling $2 billion compared to a mere $200 million in actual, material items bought and sold. (The numbers, estimated by the Chicago Tribune, seem almost quaint today, but for readers of the time, they were staggering; people weren’t used to seeing “billion” with a “B.”) Over the next 60 years, commodity prices swung wildly to and fro, as investors used various schemes to manipulate the prices of their futures—including “trying to corner the physical market by monopolising the supply of wheat or oats or pork,” and making them unaffordable for actual consumers. Reckless futures trading was one of the many factors that ultimately triggered the Great Depression, and in 1936, the Roosevelt administration took dramatic steps to restrict speculation, passing the Commodity Exchange Act and creating an entire government bureau to oversee trades. For a while, at least, the worst excesses of the market were kept in check, and the prices of things like milk and bread stabilized.
It didn’t last, of course. Almost immediately after the end of World War II, conservative politicians like Barry Goldwater and Ronald Reagan, inspired by free-market ideologues like Hayek and Friedman, made it their lives’ mission to dismantle the New Deal economic order. Throughout the 1970s and ‘80s, these newly-minted neoconservatives scored victory after victory, slowly chipping away at any form of financial regulation they could find. By 2000, the Democratic Party had all but surrendered to their economic agenda, having long since split from the labor base that propelled FDR to power—and President Bill Clinton had signed the Commodities Futures Modernization Act into law. The Act, a masterpiece of the clear-as-mud writing style inherited from futures contracts themselves, was the brainchild of Alan Greenspan (then the chair of the Federal Reserve) and his accomplice Larry Summers, both devout believers in the efficient-market hypothesis. Under the pretext that speculators were “sophisticated parties” who presumably knew what they were doing, the legislation not only removed or bypassed many of the 1936 restrictions, but it also deregulated exotic financial instruments of all kinds, from commodities derivatives to “credit-default swaps” on mortgages—a move that would be instrumental in the next great financial crash in 2008. (First as tragedy, then as farce, etc.)
The core of Greenspan and Summers’ logic (I use the term loosely) was the idea that deregulation would not fundamentally alter the financial strategies of the big Wall Street speculators. Hedge funds and trading firms were supposed to stick with a “passive” investing model, in which they “parked their capital in commodity index funds, pushing up prices,” but didn’t make many trades on a day-to-day basis, causing the overall market to remain stable. However, the investors apparently missed the memo, and almost immediately shifted to a “trend-following” model, which became the dominant one in the decade that followed. Not unlike day traders on the stock market, “trend-following” investors look for small upticks in the price of important commodities, and buy vast quantities of futures and derivatives to pursue the “trend,” pushing the price higher in the process. In this way, they create what Russell calls a “self-fulfilling prophecy,” which can cause commodity prices to balloon beyond all reason as more and more trend-chasers pile on. The goal is to ride the bubble as high as it can go, and then cash out right before it bursts, in something that bears a striking resemblance to an illegal “pump and dump” scheme in the stock exchanges.
According to the efficient-market hypothesis, this shouldn’t work at all. The trend-following strategy relies on the core assumption that prices are driven not by objective data, but by hype, narratives, and emotional responses. “I heard about this idea of Efficient Markets in 1983, and I was like, whoa—what the heck is this?” says Jerry Parker, the CEO of a trend-following firm, when Russell asks him about it. It’s a moment of surprising candor, revealing that the assumptions of Hayek and Friedman are anything but common among actual traders. But tellingly, trend-chasing strategies do appear to work, at least for people like Parker who have the capital to pursue them. In the aftermath of the 2008 crash, groups like Parker’s Chesapeake Capital Management were some of the only financial institutions to actually show robust gains, with the Financial Times writing, as Russell writes, that they had “produced substantial riches for both the customers and managers,” earning a 14 percent profit even under crisis conditions. (Mysteriously, this quote no longer appears on the FT website.) While traders who followed the Hayekian orthodoxy of efficient prices and markets lost billions, those who began by assuming that markets are inherently irrational won out.
However, these profits come at a cost, in the form of increasing instability in the price of basic human needs. “The increase of food prices and energy was definitely blamed on speculators,” Parker says, reflecting on the 2014 spike in oil prices. “Hard to deny it, seeing as how it pretty much all crashed shortly thereafter.” Parker also tells Russell, “I think Paul Tudor Jones was quoted in the media saying, ‘Energy’s gonna crash, 150-dollar price is not gonna hold.’ And I was like, hmm, I’m not gonna pay attention to that.” Like most financial crazes, trend-following creates a whole network of perverse incentives, causing Greenspan’s “sophisticated parties” to ignore the reality in front of their faces, and even the warnings of their peers. In turn, this economic self-delusion sparks a cycle of boom and bust, and drags billions of people along as the commodities markets soar to dizzying heights, before falling to crushing lows.
Price Wars contains two major threads. The first is the one we’ve just examined: a brief history of commodity speculation over the past century and a half, which reminds me very much of the late David Graeber’s Debt: The First 5,000 Years. (For reference, this is one of the highest compliments I can pay a book.) The second, though, is even more important, as it charts the very real impact the New York and London commodities markets have on the rest of the world. The book is half economic treatise and half travelogue, as Russell actually visits the places where chaotic prices have disrupted the lives and communities of ordinary people. It’s harrowing stuff, to say the least.
One of the most striking chapters is the one on Venezuela, which follows Russell on a journey through the slums of Caracas. He speaks to José Angel, a 13-year-old member of a street gang that scavenges in restaurant dumpsters, and has deadly knife fights with other gangs over the scraps they find. He hears the stories of several women who have chosen to have themselves sterilized, rather than risk having a child they can’t afford to feed. This, for the poor of Caracas, is “the new normal,” and the depths of human misery invoked by that phrase are heart-wrenching. But thankfully, this isn’t a case of voyeuristic “poverty tourism.” Rather, Russell has an important economic point to make. The suffering of the Venezuelan people, he argues, is very real—but it doesn’t represent a failure of socialism, as conservatives insist at every opportunity. Instead, it mirrors conditions in other countries, like Iraq, whose economies rely heavily on petroleum exports, and who are therefore extremely vulnerable to shifts in the per-barrel price of oil. In fact, the fluctuations of the commodities markets are written on the city itself:
“After a short while, I notice something. Many of the buildings haven’t been finished. Their concrete skeletons remain exposed. There are some cranes nearby, but they don’t seem to be doing anything. I recognise one of the unfinished structures as the notorious forty-five-storey Tower of David, a lawless city unto itself filled with drug dealers and ruled by gangs. I had heard that it was first built when the oil price rose after Saddam invaded Kuwait in 1990, only to cease construction when the war ended and the oil price collapsed. I realise that the abstract digits of the oil price are realised here in steel and concrete.
In fact, the cityscape is a bar chart of oil prices, each tower a price spike and its decay a price decline. The prices are etched in concrete: you can read the last fifty years of oil prices just by looking at these buildings.”
The same could be said, to a lesser extent, about Baghdad, Tehran, or even Moscow. Wherever oil production dominates the economy, a “petrostate” forms around it, and unless they’re protected by subsidies for their basic needs, citizens live or die by the oil market’s whims.
As Russell explains, Venezuela has spent decades caught in a vicious price cycle, which degrades its economy a little more with each loop. During periods of high oil prices, like the 1973 Arab-Israeli War, the country closed significant portions of its agriculture and manufacturing sectors, finding that its domestic products couldn’t compete with cheap imports. Instead, it shifted more and more of its resources to petroleum production, putting all its eggs in the most profitable basket. (Again, this is a market impulse, not a socialist one!) Afterward, in periods when oil prices fell—or the U.S. imposed crushing sanctions, artificially cutting off access to the world market even if the price was high—the purchasing power of the country’s oil drastically diminished overnight, making imports prohibitively expensive again. At the same time, the periods of hyper-reliance on oil revenue meant that the country was left without enough production capacity in its non-petroleum sectors to make the goods its people needed, leading to the infamous shortages of things like flour and toilet paper. At these low points, the logic of prices repeats itself on smaller scales in what Russell calls a “fractal apocalypse,” as people resort to trading household staples on the black market, and try to gouge out the best price by speculating on what conditions will be like next month. Serious flaws the government of Venezuela certainly has, but at every level, it’s prices and markets that define the country’s pain.
Venezuela is far from the only country, though, where changing prices have caused chaos. In Tunisia, Russell notes, riots over the rapidly increasing price of bread helped to kick off the Arab Spring, which helped to cause the Syrian refugee crisis, which helped in turn to cause Brexit. In Russia, spikes in the oil and gas market allowed Vladimir Putin to invest billions into military hardware, and helped to convince him that invading oil-rich Ukraine would be a profitable venture. And in the U.S., speculation over the possible impact of that invasion caused the price of virtually everything to leap skyward, despite the fact that we actually import very little from either Russia or Ukraine. Every morning, if we know how to look, we can see the fingerprints of the commodities traders all over our newspapers, and there’s no telling where today’s transactions will end up tomorrow. The entire system is an ornate network of dominos, and one nudge in the wrong place could bring it all crashing down.
So, to sum up: the commodities markets are absurd, unstable, and dangerous. But what, if anything, can be done about them? Russell is a journalist by trade, not an economist, and he’s certainly not a political firebrand. The closest he gets to a programmatic solution, in a recent Jacobin article, is the suggestion that President Biden “put those who make, distribute, and sell physical commodities back in charge of prices, just as Roosevelt had done when he faced speculative chaos.” But this would only mean a return to Roosevelt’s status quo of 1936—and, if we recall, it only took about 60 years to undo those reforms. I have my doubts about whether this system can be effectively regulated without another Alan Greenspan or Larry Summers simply coming along to deregulate it all over again. Instead, it seems far more likely that the price system could simply burst at the seams, as it almost has several times already, and plunge untold billions into famine overnight.
If we’re going to avert that final crisis, we’ll need to think more radically. We’ll need to discard the idea that markets are the best—or even an acceptable—way of distributing the world’s resources. In the process, we’ll need to revisit the heresies of central planning and price controls with new eyes, as Ben Burgis does in his recent Current Affairs review of Red Plenty, and see what can be learned from the failed experiments of the 20th century. At the very least, Wall Street will need to be taxed far more heavily, as Bernie Sanders proposed in 2021—and some of the funds should become reparations payable to countries in the Global South that have suffered the aftershocks of the West’s financial tinkering. We may need to abolish some things, like commodities futures and derivatives, altogether, and think seriously about legal penalties for the people who peddle them so recklessly. There will be stumbles along the way, as there are with any new endeavor, and some of them may be significant—but whatever new system we create, it cannot possibly be more irrational or destructive than the one we currently have.
Leaving things as they are is not an option. For humanity to live in peace and security, the commodities markets as we know them will have to die.