WASHINGTON – First was the dot-com bubble, then the housing bubble. Now comes the commodities bubble. We don’t fully understand the stock market’s current turmoil, but we do know it’s driven at least in part by a bubble of raw material prices. Their collapse weighs on world stock markets through fears of slower economic growth and large financial losses.
All bubbles share similar characteristics. There’s a strong, enthusiastic demand for some object (whether stocks, homes, oil or tulips). High demand pushes up prices, which inspires more demand. Prices ultimately reach unsustainable levels so that when spending slows, the bubble implodes. Commodities have now traced this familiar path.
As The Economist reminds, raw material prices respond to different influences. Weather affects crops; technology (aka “fracking”) affects oil recovery. Still, despite these variations, prices of many commodities – not just oil – have followed roughly similar trajectories in recent years. They have dropped steeply, according to figures from the International Monetary Fund.
Here are declines for five commodities from 2012 through July 2015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. Many commodity prices have continued to fall.
The bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials, says economist John Mothersole of the consulting firm IHS Global Insight. China’s demand seemed destined to stay strong.