If the Sen committee could find no evidence that speculation in futures markets was linked to commodity price increases, thereby giving substance to the argument that futures markets aid price discovery, the Soros position will revive the debate from the other side of the fence. For instance, it has been the view of some West Asian observers that if the average price of the Indian crude basket is usually lower than the most widely traded oil varieties (West Texas Light and Brent, for instance), it is not only because of a difference in the quality of crude, but in part because there is less speculation in the crude varieties that go into the Indian crude import mix. And while the Prime Minister has not entered this particular debate, he did say a few weeks ago that a small increase in oil demand seemed to be causing a disproportionate increase in the price of the commodity.
As it happens, the latest issue of The Economist gets into this debate on the side opposed to the Soros view. It puts out the news that some $260 billion has been invested in commodity funds, which is 20 times the level of 2003. The magazine then goes on to debunk the argument that this new speculative energy is fuelling the oil price increase because every barrel of oil bought in the futures market is sold back again before the contract ends, and that while this may increase the price of "paper barrels", it has no impact on the price of the actual commodity. The magazine goes on to concede that high futures prices could lead people to hoard oil, but points out that there are few signs of such hoarding. The Economist's explanation for the oil price spurt is that demand has grown, and it takes time for supply to catch up because finding and developing new oil fields is a time-consuming business.
Two views have emerged from this debate. Mr Soros apparently thinks the pricking of the price bubble is not imminent, but the substance of his argument suggests that a correction cannot be too far away, whereas The Economist thinks it will take a while longer for supply to catch up and then level prices. Which view is right will be known before long, for Mr Soros's view by its very nature implies a short time scale.
