Word of the Day

Commodity

Even if you don't think you do, you already know plenty about commodities. Want us to prove it? No problem.

What makes oil produced in Saudi Arabia different from oil exported from Nigeria? It's the same thing that makes the corn you ate at last summer¿s barbecue different from the corn used to produce ethanol. Stumped? Well, don't feel bad, it's a trick question. The answer? Absolutely nothing. Corn is corn no matter where it comes from -- just as wheat is wheat and natural gas is -- right! -- natural gas. (Though the quality may differ, the make-up is uniform.)

So, in less elaborate terms, corn and oil (and all other commodities) are homogenous goods that can be processed, resold and more often than not, used as an input to the production of other goods or services. These goods are traded on a commodity exchange, thus setting the price-per-barrel (or other metric unit) used to value them.

Now pay attention, here's a question that indeed does have an answer: What is the difference between a commodity and a stock? While a stock can tank and become worthless, a commodity cannot have its value be wiped to zero. One other difference: Most commodities are traded in futures, meaning traders buy and sell where they think the price of a product will be at a certain point in the future. Stocks trade based on the value of the underlying company at that point in time.

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Tuesday, June 10, 2008

Regulator: Investigation of Energy Markets Needed

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FOXBusiness

While consumers scratch their heads at $4 gasoline prices, a federal regulator said on Tuesday that government investigation is needed to see if prices are being driven by supply and demand or manipulation.

"The bottom line is, we need to investigate, in a comprehensive and probing manner, what is happening in these markets before making a rush to judgment about what is or what is not causing these unusual price movements," said Bart Chilton, a commissioner at the Commodity Futures Trading Commission, in a statement.

The CFTC is in charge of regulating the U.S. futures market, which some say has had an influx of speculators that have caused unusual price movements in commodities like oil.

Chilton made his comments before the first meeting of the Energy Markets Advisory Committee, which is a 25-person group of lawmakers advising the CFTC.

Earlier on Tuesday Treasury Secretary Henry Paulson said the run-up in oil prices have little to do with speculators.

"Perhaps the secretary has a crystal ball, but I don't, and given what I'm seeing and hearing in the markets and from market users, that seems to me to be a premature determination, at best," Chilton said.

While crude oil prices have fallen the past two days, they soared last week. Oil surged an unprecedented $16 during a 48-hour span last week, including a $11 rise on Friday. Crude prices have more than doubled from just a year ago and some experts have predicted $200 oil in the foreseeable future.

In addition to possible manipulation, energy analysts have blamed the rise of oil on the weakened U.S. dollar, greater demand in emerging markets and lower supply.