Saturday, May 31, 2008

Speculation cannot affect prices very much.

Fear about future troubles in oil producing countries add to the price of oil.

How can these two ideas be reconciled?

5 comments:

Robert D Feinman said...

Speculation in oil is different than for many commodities. One can't hoard oil the way might with gold. So futures traders have to close out their positions when contracts expire.

They can make short term profits (or losses) by betting on what will happen to the spot price between the time that the buy or sell a contract and the time it expires, but this is only a few months.

Oil producing states can "speculate" by withholding oil from the market, by producing less. If they think that the price will rise in the future they can make more money by leaving it in the ground and just waiting awhile.

This may be going on, but it should be easy to discover since shipments would have to decline and this can be measured. What the pols and fuel consumers want is to find a villain this removes the onus from us. We still don't want to admit that consuming 40% of the world's resources with 4% of the population is unsustainable.

It seems more likely that many oil producing states can't really increase supplies because of oil field limits and/or production constraints. Sometimes bad new is bad because it's bad.

Bruce Webb said...

I don't think those ideas can be reconciled.

In my lifetime we actually had a Toilet Paper Crisis. Stores couldn't keep it on the shelves and for all I know there may have here or there sprang up a black market. This was not rational behavior and had no economic explanation. After all we were not approaching some sort of state of Peak Fiber.

I don't have any explanation for oil prices other than the time honored 'What the market will bear', when the oil companies see an opportunity to increase their margins they will. Certainly I don't put any credence in the oil companies testimony to the effect of 'We had no choice'. Come on, they could at least of allowed their overall margin to stay steady year over year by using some restraint on wholesale pricing, instead as always they acted to maximize profits. Which of course does have a perfectly plausible economic explanation though maybe not particularly an admirable one. Because not everyone agrees with the fictional Gordon Gecko that 'Greed is good'.

Anonymous said...

i have a sneaking suspicion that in america the heavy borrowing and the price of housing and other major outlays changed how people thought about the price of driving -- at least the wealthy people -- so when nervous speculation drove up the price and it didn't noticeably affect demand -- ah-ha! we have discovered a new correct price!

an infinite number of houses worth an infinite amount of money could fill your tank for ages

reason said...

I think the premises need to more specific. Speculation cannot affect what prices how much for how long? If speculation does anything it changes prices (that is the whole point). One of the arguments FOR speculation is that it BRINGS FORWARD needed price adjustments.

Otto said...

I have a hard time believing that speculations brings "needed" price adjustments. How can you justify the huge influx into the commodities markets? Was that "needed" reinvestment since the mortgage frenzy fell on its behind.

Hedge funds are there to minimize risk and they seem to be doing a fine job recently. Without proper overview the commodities trading how can we me certain that the dependent world oil users are getting the shaft from big banking and big oil?

Just be glad your an American citizen, because you can still afford the fuel. If it wasn't some poorer nations fuel subsidies the fuel crises would have hit about three or four months ago in their countries. The American citizen, needs to act now and push for more regulations into commodities markets.