"It is a self-fulfilling prophecy. They can invent reasons why oil prices go to $130 or $150, but history shows that these people are capable of moving markets. It is not Exxon (XOM) or BP (BP) or Shell (RDS.A) that moves the oil markets. It is the financial players. It is theGoldman Sachs (GS), the Morgan Stanley (MS), or the other guys. It is a shame on the government that allows them to get away with that." -Oppenheimer oil analyst Fadel Gheit, Bloomberg TV, May 25, 2011

I recently explained here how excess liquidity lent to investors by the Federal Reserve at virtually no interest-helping investors use leverage as never before-created a maelstrom of activity in the commodities market. All that cheap money has pushed oil prices much higher than actual supply and legitimate demand would dictate. Covered also was the fact that during the campaign of 2008, when oil was nearing a new high of $147 a barrel, Presidential candidates Barack Obama and Senator John McCain (R-Ariz.) knew why and promised to fix it.

Both candidates recognized what was happening in the markets and promised to repeal the Enron loophole that was created in 2000 by the Commodities Futures Modernization Act. This essentially deregulated financial products known as over-the-counter derivatives and loosened capital requirements. It allows traders to run roughshod over our economy, pocketing excessive profits and slowing the pace of recovery.

Amazingly, many continue to debate whether or not commodity traders are even responsible for today's outrageous oil pricing. To industry professionals-among them Fadel Gheit, one of the most respected oil analysts; key members of OPEC; Rex Tillerson, chairman and chief executive of ExxonMobil; and the heads of Petronas (PTG:MK) of Malaysia and Total (TOT) of France-what is taking place is obvious.

David Fuller's view This is a familiar topic for veteran subscribers, having occupied many column inches in Fullermoney over the years. I will not review all that. However, I will say that Ed Wallace makes some good points, albeit in a populist fashion which cause him to somewhat overstate his case, in my opinion.

Near zero interest rates have certainly led to an increase in speculative activity, to which loose regulation has also contributed. In this environment large institutional speculators can game the system, to a point. This can and has created self-feeding trends in key commodities which were never intended to be financial assets. It has caused real economic damage in driving the price of crude oil upwards well beyond global supply and demand in 2008 and again earlier this year.

The latter and steepest portions of these moves are caused mainly by speculation but the economic consequences are real. Staple foods and many other commodities have been similarly affected in recent years. Some of the most damaging moves, in my opinion, have been caused by people who do not consider themselves speculators. From university endowment funds to private investors, an increasing number of people have channelled a portion of their investment funds into commodity futures tracker funds.

Commodity trackers are a poor investment over time, as Fullermoney has often pointed out, due to the large contango costs to which they contribute. This can distort the markets for commodity producer and consumer businesses, making normal hedging practices, for which the commodity futures markets were intended, more expensive.

However, very little of this dramatically increased speculation in commodity markets would take place without extremely strong global demand for commodities which cannot always be produced in sufficient quantities. This is the secular bull market led by demand from China which Fullermoney has often referred to for nearly a decade, describing the price dynamic as: Supply Inelasticity Meets Rising Demand.

It is also why Fullermoney has often described commodities as an opportunity when prices are depressed by the business cycle, destined to become the next big problem in the economic recovery which follows. That problem came home to roost in 2008 and again in 2011.

Fortunately, high commodity prices eventually provide their own cure, often with the help of the business cycle, by curbing demand and increasing production and / or substitution.