Households Paid for the Iran War. Speculators Got Rich.
Deregulated financial markets transmitted the cost of war straight to households - and the profits straight to Wall Street.
A few powerful people have made a lot of money from the Iran war. Just before the ceasefire announcement, several investors placed bets worth $950 million on falling oil prices. When oil prices fell by about 15% following the announcement, those traders each made several hundred thousand dollars instantly.
It’s hard to avoid the conclusion that these accounts exploited insider knowledge to make money. There is a name for this practice: insider trading. And it’s illegal when you’re trading on regulated financial markets. But Polymarket isn’t a regulated financial market, so technically it isn’t covered by insider trading rules.
Trading platforms like Polymarket are very clearly rigged towards those with inside information. It’s pretty easy to see how wrong that is. But Polymarket traders aren’t the only ones who have benefitted financially from this war. Commodities traders have made huge profits too – and these profits have come at the expense of ordinary households
Inside the oil futures market
Seasoned investors don’t make bets on the oil price using Polymarket. They trade oil futures.
An oil ‘future’ is essentially an agreement to buy or sell a quantity of oil – actual, physical oil – at a specified future date. Oil companies sell these futures to lock in prices. BP, for example, might sell a contract for 1,000 barrels of crude oil at $80 per barrel in a year’s time, which guarantees their future revenue.
On the other side of the trade, an airline operator might buy the contract to ‘hedge’ their exposure to fuel costs. If you’re an airline and the oil price rises, your costs will go up because you’re paying more for oil. But you can offset the increase in your input costs by purchasing futures.
How does this offsetting work? Imagine you have contract to buy 1,000 barrels of Brent crude at $80 per barrel in a year, but suddenly people are willing to pay $90. Technically, you could receive those 1,000 barrels for $80,000 and sell them for $90,000. In reality, most futures contracts allow you to cash on price changes without physically exchanging the oil.
The other actors in the mix are commodities traders. They’re not in the market to sell their future output, like BP, or hedge input costs, like the airline operators – they’re in it to make money. If, say, a hedge fund thinks OPEC is about to cut oil production, they can buy oil futures and profit when the oil price rises.
How speculation amplifies shocks
So, oil isn’t just traded as a physical commodity – traders can also use futures to make bets about oil prices in financial markets. And financial markets respond to information differently from physical ones. A refinery cannot instantly adjust its output in response to a headline. But a futures trader can reprice expectations in seconds.
This matters because more speculative trading – i.e. the kind of trading undertaken by commodities traders – amplifies the magnitude of short-term price swings.
If a bunch of hedge funds make big bets that the oil price is about to rise, these bets will feed on one another until the futures price is miles away from what might be expected based on a dispassionate analysis of supply and demand. One recent paper found that excess futures trading explains more than half of the short-run variation in the current (spot) price of oil – and that these effects grew stronger after deregulation.
Debt amplifies volatility even further. Commodities traders often trade using borrowed money, so big movements in price often trigger demands for more collateral to back their position (margin calls). Sometimes, traders can’t meet these demands for collateral, so they have to liquidate their position (i.e. sell). And all these sales amplify the price movements that triggered the need to sell in the first place.
These wild swings might be corrected over the medium- to long-term, but by this point the damage has already been done. The price of petrol, for example, will generally rise with futures prices, so consumers already been forced to pay more – even before any real supply constraints have actually materialised. Everyone else has effectively been taxed to subsidise the profits of big finance.
We saw this dynamic play out very clearly during Trump’s war in Iran. The moment any bad news about the conflict surfaced, futures markets became an instantaneous mechanism for fear transmission. Oil prices surged, but physical production couldn’t be adjusted nearly as quickly. Prices eventually fell when traders readjusted their bets, but consumers still found themselves paying higher prices at the pump – because retailers are much more likely to adjust prices up than down.
At the same time, volatility means higher profits for commodities traders. The world’s largest oil trader, Vitol Group, reported making profits about of about $2 billion in one quarter on the back of volatility induced by the Iran war. The world’s second largest oil trader, Trafigura Group, had one of its best ever quarters. Another oil trader, Gunvor Group, made more in the first quarter of this year than it had in the entire previous year.
Who pays for financialisation?
From the early 2000s, commodities trading has been deregulated. Since then, more investors – from hedge funds, to investment banks, to pension funds – have been sucked into commodities trading. Today, these markets are dominated by financial actors looking to make a profit – rather than by the firms producing the commodities, or those buying them to hedge input costs.
In other words, commodities markets have been financialised. And this has helped to increase volatility, which has pushed up prices for consumers – and other actors in the ‘real’ economy. At the same time, it has generated massive profits for commodities traders. In effect, we’ve all been subsidising the profits of the finance sector.
With or without commodities traders, the war in Iran would have caused oil prices to increase. But they wouldn’t have increased so sharply, and so quickly, were it not for the role of financialised commodities markets. A less financialised commodities trading system would have seen prices rise in a slower, less erratic, and more manageable way – one that would have imposed lower costs on everyone else.
Trump and Netenyahu might have caused this conflict. But our hyper-financialised economic system transmitted its costs onto households so quickly that they had no time to adjust. But the beneficiaries of this shock were oil companies, commodities traders, and investors with inside information.
Why do ordinary people without inside knowledge do this, anyway? They may as well hand their money to an insider.
Well f us. 😡