Commodity Speculation

          Congress is proposing legislation to restrict speculation on the oil market.  Is this beneficial to the American consumer, will it decrease the price of oil?  No, a recent paper written by Phil Abbott and Economics Professor from Purdue discusses in detail that speculation has not contributed to the recent surge in oil prices.  The paper underlines the correlation between the weakness of the dollar and the price of commodities.  Commodities are valued in dollars and a depreciation of the dollar makes commodities more affordable on the international market, thus increasing the demand for commodities.  Increased global consumption has increased the price of all commodities pork bellies and wheat included.  In short the decreased value of the dollar has contributed toward global inflation because it has fostered excess growth which has increased the price of commodities. 

            Over the past week oil has decreased by 15 percent, I doubt that Congress will blame speculators for shorting oil and forcing the price of oil down.  The dollar has consequently appreciated across the board.  The correlation between the price of oil and the strength of the dollar is undeniable, which gives the Fed another reason to raise rates.  By raising rates the Fed could actually help the economy, because the price of oil would fall dramatically.  The Fed’s current Dovish bias has done as much as supply and demand to raise the price of oil.  If the Fed could decrease both the price of oil and inflation, what is stopping them from raising rates?  Equities, unemployment, and the health of the financial sector are the only justifications for not raising rates.  The stock market seems to have stabilized and financial stocks have appreciated 30% across the board.  Banks are still fragile even though the FDIC claimed that Indy Mac would be the largest fatality of the credit crunch.  The question now becomes whether baby sitting banks is worth the weak dollar.  In the short run yes, but in the long run the Fed needs to take a more Hawkish tone towards inflation.  Will the Fed raise I doubt it, but the benefits could soon outweigh the risks.