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Gas price rises. Before any action is taken to calm it down, it is urgent to understand the dynamics of commodity markets.

The price of gas has soared over the past year, alternating with slight declines. The conflict in Ukraine has certainly amplified the rise by galvanizing speculation. Speculators are predominantly in the West. Putting a cap on the price may be one solution (which the U.S. is calling for). It is not yet clear how it would work. It also represents a dangerous precedent that could have unintended and unpredictable consequences against free market logic. Before any intervention, it is urgent to understand the dynamics of speculation in the commodity market.

The supply and demand dynamics of commodities, such as gas and oil, attract the interest of industrial and financial investors. The former invest in production and distribution processes, the latter invest in the former but also in the (intangible) buying and selling of commodities. The behavior of the former increases or decreases the price gradually, the attitude of the latter can cause the price to collapse or spurt upward in a very short time (as in the case of gas).

Understanding the dynamics that govern commodity prices helps to produce sustainably. Free market dynamics, namely the interests of investor producers and consumers, are protected. You need rules that help the invisible hand to encourage investment (and innovation) and consumption.

In the natural commodity market, the price is determined by the relationship between supply and demand, and particularly by production costs. In the case of gas, these are the investments to identify deposits, extraction costs, and infrastructure for distribution and operation.

Once it reaches the (natural) market, the price of gas rises and falls depending on the demand of those who buy it, be it the grid operator or the end consumer.

With the exponential evolution of the artificial financial market, new players also come to the market. Some (traders) influence the dynamics of supply and demand by intermediating between those who produce and those who buy. They have an interest in trading to buy low and sell high.

Others, however, bet on the future price by buying (virtually) larger or smaller quantities of gas that they will then sell back to other buyers. They bet based on experience and knowledge of the commodity market and the factors that influence it (climate, wars, demand, etc.). And in turn they have an interest in influencing these factors to push the price up. They bet to buy low and sell high. They bet without ever going to the market and touching the commodity in any way. In fact, they sign contracts with the price that the commodity will have at a specific time in the future.

Their bet is financed (and insured) by many other investors who lend them (virtual) money because they believe in the goodness of their choices.

These bets are made not by going to the natural (physical) market but to the financial (virtual) market designed for this type of transaction. These are the commodity exchanges.

Financial market speculation would not be bad if the natural market participants, and the end consumers, also gain. The whole supply chain gains.

At this stage in history, however, only the financial markets and a few traders gain. Intervention is therefore necessary to make sure that the investments of all operators and the purchasing power of consumers (i.e., citizens) are protected.

For some it is enough to put a cap on the price of gas. It is unclear how and where along this complex chain of gas market participants the cap can be applied.

We also struggle to foresee the unintended consequences of this proposal. We just can’t because it is so intricately articulated that it is hard to see who would benefit. The U.S. and the Italian government like it, but they have forgotten to explain it to their citizens. Northern European countries don’t like it. Many financial speculators are right in the West.

Certainly the gas cap would set a dangerous precedent of meddling, especially if the logic of its operation is not well explained.

Other governments have practiced different paths with other commodities. For example, they have halted exports of wheat and sugar (partially, in India), and palm oil (for a month, in Indonesia). They think to bring down the price by discouraging speculation influenced by the international market. In fact, it is better for traders to sell abroad at market prices or at home at capped prices. Or even it is better to manipulate distribution to raise prices and sell on the black market.

It was a social equity choice in countries where distribution is very long and fragmented, with so many middlemen. They have shown that they have grasped the problem, although they cannot solve it except by drastic but useless interventions in the long run.

The Italian government is introducing a levy (of 10 percent) on the higher price formed in the (Italian) market than the entry price. It is in addition to the tax on extra profits. The choice is smart but can do little if the entry price is already high. The problem is clearly international, not domestic. And it contrasts with what the prime minister pontificates in Europe, namely the price cap.

The government should commit itself to promoting this higher taxation on profits among EU members. Why does it not?

In the West we continue to delude ourselves that the problem of commodity prices is the conflict in Ukraine and Russia’s perfidy. Instead, we should study the supply chains well to understand where bad speculation lurks and discourage it. Otherwise we prove ourselves liberal and democratic in words, but in deeds we are worse than oligarchies.

The EU (it is about to do so) and the Italian government must study commodity supply chains; they must explain them to citizens so they understand the dynamics of the markets that affect them; they must stop blaming neighbors when the first culprits are at home; they must intervene to discourage bad speculation.

If we want to export democracy with markets and trade (and not with NATO) we must show that we are liberal in behavior.