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"The nonsense in this debate makes me want to shoot someone in the face"
While "listening" to all the songs streamed on the Camp Rock MySpace (so far, they're mostly borderline: disappointingly weak performances of somewhat catchy material), I've been reading Paul Krugman's blog, where he's been posting a lot recently about the relation between oil speculation and the rising price of oil. Basically, he says there's no relation - no evidence that the current price of oil has anything to do with speculation, since the only way speculation can cause a rise in actual oil prices is if someone is withholding inventory. And there's no evidence of this. Here's an excerpt:
Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won't. What direct effect does this have on the spot price of oil - the actual price people pay to have a barrel of black gunk delivered?
The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn't make any difference.
Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that's true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.
Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.
As I've tried to point out, there just isn't any evidence from the inventory data that this is happening.
And here's one more fact: by and large, futures prices over the period of the big price runup have been slightly below spot prices. The figure below shows monthly data from the EIA; as the spot price shot up, the futures price (that's contract 4, the furthest out) actually lagged a bit behind. In other words, there hasn't been any incentive to hoard.
As I've said, I don't have a political dog in this fight. But the nonsense in this debate makes me want to shoot someone in the face.
(He points out elsewhere that conservatives, who normally are ready to praise markets out of hand, are wanting to blame "oil speculators" because otherwise they'd have to admit that demand will continue to increase in relation to supply unless we make an effort to find alternative sources of energy and to cut back on energy use.)
Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won't. What direct effect does this have on the spot price of oil - the actual price people pay to have a barrel of black gunk delivered?
The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn't make any difference.
Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that's true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.
Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.
As I've tried to point out, there just isn't any evidence from the inventory data that this is happening.
And here's one more fact: by and large, futures prices over the period of the big price runup have been slightly below spot prices. The figure below shows monthly data from the EIA; as the spot price shot up, the futures price (that's contract 4, the furthest out) actually lagged a bit behind. In other words, there hasn't been any incentive to hoard.
As I've said, I don't have a political dog in this fight. But the nonsense in this debate makes me want to shoot someone in the face.
(He points out elsewhere that conservatives, who normally are ready to praise markets out of hand, are wanting to blame "oil speculators" because otherwise they'd have to admit that demand will continue to increase in relation to supply unless we make an effort to find alternative sources of energy and to cut back on energy use.)