I spent the last week with managers from several different industries--agriculture, steel, large industrial pipes, newspapers, technology services. These participants confirm the fact that commodity prices in addition to oil are increasing steeply. Biofuels and overall world demand is driving up the cost of grains. Skyrocketing steel costs are driving up costs for anyone using steel (gone up 75% in just last year according to one of these managers). Newsprint is also going up, impacting newspapers.
Today's Wall Street Journal reports that soaring transportation costs (along with other factors) is starting to bring manufacturing back to the U.S. If soaring fuel costs have this kind of impact (see chart), other chain reaction impacts will occur that will be upsetting to consumers and a number of industries. Commodity prices are causing havoc.
But are they? Commodities tend to be driven by supply and demand. These commodities that are going up are feeling supply and demand pressures (either increased demand, sagging supply, or both). When there is demand pressure, prices naturally go up, which incents companies to increase supply. So these price increases are actually a beneficial effect of supply and demand. In an environment where business is allowed to operate freely (relatively speaking) forces will soon emerge that increase supply or find less expensive substitutes. Also, consumers will change their habits to decrease demand as they have more trouble paying the high price.
And it does hurt a lot of companies operating in businesses using the commodities. But it also opens opportunities for businesses who identify market needs and find ways to exploit them. Of course, politicians will get involved and rarely do they make things better in the long run. So watch in this next cycle of the elections for politicians to pander on the rising commodity prices, promising to fix the short-term pain that is part of business. But don't bet any of their solutions will be effective . . . just hope they do little harm.
Today's Wall Street Journal reports that soaring transportation costs (along with other factors) is starting to bring manufacturing back to the U.S. If soaring fuel costs have this kind of impact (see chart), other chain reaction impacts will occur that will be upsetting to consumers and a number of industries. Commodity prices are causing havoc.
But are they? Commodities tend to be driven by supply and demand. These commodities that are going up are feeling supply and demand pressures (either increased demand, sagging supply, or both). When there is demand pressure, prices naturally go up, which incents companies to increase supply. So these price increases are actually a beneficial effect of supply and demand. In an environment where business is allowed to operate freely (relatively speaking) forces will soon emerge that increase supply or find less expensive substitutes. Also, consumers will change their habits to decrease demand as they have more trouble paying the high price.
And it does hurt a lot of companies operating in businesses using the commodities. But it also opens opportunities for businesses who identify market needs and find ways to exploit them. Of course, politicians will get involved and rarely do they make things better in the long run. So watch in this next cycle of the elections for politicians to pander on the rising commodity prices, promising to fix the short-term pain that is part of business. But don't bet any of their solutions will be effective . . . just hope they do little harm.
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Supply and Demand Sets Oil Prices – If You Believe That, I have a Bridge in Brooklyn I Want to Sell You!
Next time you have to buy diesel fuel, home heating oil or $4 plus gasoline. Ask yourself this question: Are crude oil, heating oil and gasoline necessities, or just ordinary speculative commodities? If they're the former, how can they be the latter? How can anyone buy into supply and demand setting oil prices when the markets are overwhelmed by everyone from small speculators, to institutional investors, to commodity index funds and large hedge funds and to Wall Street banks buying massive amounts of oil contracts? We also have the b.s. of “geo-political” concerns and government disseminated bogus “inventory” numbers. More on these factors at www.useconomycrisis.com
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