Raw materials

Economics columnist Robert J. Samuelson points out that it isn’t just oil that is skyrocketing. Raw materials of every kind have shot up. He decries the scapegoating practiced by both political parties, which blames oil companies or speculators and puts the blame at unprecedented economic growth by countries that used to be poor but that are now buying up raw materials just as the developed world does :

Raw materials prices have exploded across the board. From 2002 to 2007, oil rose 177 percent, corn 70 percent, copper 360 percent and aluminum 95 percent. But that’s just the point. Did “speculators” really cause all those increases? If so, why did some prices go up more than others? And what about steel? It rose 117 percent — and has increased further in 2008 — even though it isn’t traded on commodities futures markets.

A better explanation is basic supply and demand. Despite the U.S. slowdown, the world economy has boomed. Since 2002, annual growth has averaged 4.6 percent, the highest sustained rate since the 1960s, says economist Michael Mussa of the Peterson Institute. By their nature, raw materials (food, energy, minerals) sustain the broader economy. They’re not just frills. When unexpectedly high demand strains existing production, prices rise sharply as buyers scramble for scarce supplies. That’s what happened.

“No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn’t invest enough,” says analyst Joel Crane of Deutsche Bank.

Prices, Samuelson said, will moderate once the high prices tease out more production; that is, if world governments will allow for more mining, drilling, and growing.

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  • Not to mention the government paying farmers to turn corn into ethanol fuel. When government attempts to control and regulate the economy, even relatively small parts of it, the results are usually far worse than the alternative.

  • Not to mention the government paying farmers to turn corn into ethanol fuel. When government attempts to control and regulate the economy, even relatively small parts of it, the results are usually far worse than the alternative.