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How Does Commodities Trading Affect the US Economy?

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high gas prices

You can thank commodities traders for high gas prices.

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Question: How Does Commodities Trading Affect the US Economy?
Answer: Commodities trading affects the economy every day. It can be helpful to you because it makes public the analysts' forecasts of future prices of the most important market goods. These traders can spend all day studying future scenarios. If you suddenly see corn prices rising, you know they expect increased demand, perhaps from new regulations regarding ethanol, or decreased supply, such as from a drought.

Traders Create Oil Price Bubbles

One of the most important commodities is oil. The price of oil changes daily, which has an impact on every good and service produced in America. As traders take into account all information regarding oil supply and demand, as well as geopolitical considerations, this affects oil prices. It is these assumptions behind oil prices that affect the economy so significantly. For more, see Why Are Oil Prices So High?

Thanks to commodities traders, oil prices can be affected by more than just the laws of supply and demand. For example, in 2008 oil prices skyrocketed. The was despite the fact that global demand was down and global supply was up. The Energy Information Administration reported that oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter of 2007 to 85.73 million bpd as of in the second quarter 2008. During this same time period, supply rose 85.49 milion bpd to 86.17 million bpd. According to the laws of supply and demand, prices should have decreased. Instead, by May prices rose almost 25%, from $87.79 to $110.21 per barrel of oil.

The EIA reported that the "flow of investment money into commodities markets" caused the trend. Money that traders had invested in real estate or stocks was diverted into oil futures. Later that year, frenzied commodities traders drove the price up to its all-time high of $145 a barrel.

How Traders Caused Food Riots

Commodities traders were also responsible for high food prices that created riots in less-developed countries.First, funds were also directly diverted into wheat, corn and other commodities. Second, high oil prices leads to higher distribution costs for food. For more, see What Is the Real Reason for High Oil Prices? (Source: BBC News, Commodity Boom Continues to Roll, January 16, 2008; CNN, Riots, Instability Spread as Food Prices Skyrocket, February 18, 2008)

Thank Commodities Traders for High Gas Prices

In January 2013, traders bid up oil prices early in the year. They were concerend about a potential threat on of the world's most strategic oil shipping lane. Iran created the fear by playing war games near the Straits of Hormuz. By February 8, oil prices had risen to $118.90/barrel, sending gas prices to $3.85 by February 25.

This was earlier than in 2012, when Iran actually threatened to close the Straits. Traders didn't bid up oil prices until March, sending gas prices higher in April.

In 2011, oil prices didn't start rising until May, sending gas prices up immediately. This was a result of traders anticipating higher oil and gas prices due to higher demand from the summer driving season.

Oil makes up 72% of the price of gas. When oil prices rise, it usually shows up in gas prices a three to six weeks later. For more, see How Crude Oil Prices Affect Gas Prices Article updated September 18, 2013

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