The war in Iraq and the period of volatility

The causality principle does not imply “after means caused” and we do not consider the war in Iraq as the cause of economic volatility in the U.S. and world wide. At the same time, the war in Iraq was the first big war for resources after the USSR disintegration. In 2003, the level of volatility in resource prices jumped and has been very high since then. We illustrate this jump in several figures below.  We present the evolution of relative producer prices, pi, of selected commodities, iPPI. In order to remove the base effect we calculate the deviation from the overall PPI, PPI, and normalize it to the PPI:

pi(t)= (PPI-iPPI)/PPI

where i corresponds to iron&steel, gold ores, crude petroleum (US domestic production). 

A higher volatility is not a surprise for the market but since 2004 is has a coherent driving force behind all commodities. It seems that this force is not an economic one but includes a strong component of new political (military) balance. Libya might be the most recent example.

Cui prodest? Might be speculators but not honest investors and general public.