The financial crisis and wild gyrations in commodity prices have exposed deep conceptual flaws in the way academics and regulators think about commodity markets that will force a fundamental re-think.
In particular, they have demolished three key main planks on which the laissez-faire approach to regulation has rested:
* Fundamentals linked to physical production and consumption of commodities are the principal drivers of prices. Speculators or investors provide an important source of market liquidity, smoothing out temporary imbalances. Their activity may accelerate the adjustment, or even cause the market to overshoot. But speculative influences cannot force prices away from fundamentally determined equilibria for any sustained period.
* Commodity markets are highly competitive, with many buyers and sellers, each accounting for a small share of the overall market, unable to influence the prices set to any great extent.