Wednesday, January 7, 2009
MasterResource Post on Oil Speculation
Over at MasterResource I make another guest blog post, this time tackling Robert Bryce's possibly premature concession on whether speculators were driving oil prices. I don't really take a stand but just try to clarify the debate:
Incidentally, I knew when I wrote it that that last sentence was a bit long. But man, that last sentence is a bit long.
In the broadest sense, any price is caused by “supply and demand.” The prices for Las Vegas real estate in 2006, as well as for Dutch tulip bulbs in 1637, balanced the quantity demanded with the quantity supplied. Even at the height of a speculative bubble, sellers can only receive what buyers are willing to pay.
In the present context, however, it is common for people to contrast “the fundamentals” from mere “speculative demand.” In the case of oil, if demand has increased because factories need to run their machines harder or because refiners expect motorists to buy more gasoline, then that is deemed a legitimate, fundamental driver of higher oil prices. On the other hand, if hedge fund managers invest in oil futures contracts not because they forecast higher fundamental demand, but rather because they are simply betting that the market value of the contracts will appreciate, allowing the hedge fund to unload the contract before physical delivery, then that is considered pure speculation.
Incidentally, I knew when I wrote it that that last sentence was a bit long. But man, that last sentence is a bit long.
Comments:
But that distinction isn't quite what people mean either, is it? After all, if a hedge fund bought contracts because it anticipated their appreciation, people (I suspect) still don't generally call that "speculation" if the HF is anticipating appreciation *due to factories needing more oil*. Rather, they would regard that as driven by fundamentals also, with the HF as a mere intermediary in the process.
I think people use the term speculation (or "bubble") to refer to when people buy because they expect to unload on some other, stupider idiot (for lack of more precise terms), whether or not factories need more oil.
Am I right, or is this not what they mean?
I think people use the term speculation (or "bubble") to refer to when people buy because they expect to unload on some other, stupider idiot (for lack of more precise terms), whether or not factories need more oil.
Am I right, or is this not what they mean?
# posted by 
: January 7, 2009 at 11:45 AM
: January 7, 2009 at 11:45 AM
Hedge funds have to sell to people who will actually use the oil eventually right? They don't want the actual oil. If they buy a contract for February delivery, they have to sell it is a factory or refinery, etc. before February rolls around (or sell it to another speculator, who would then have to sell it to an actual oil consumer by February).
So if speculation drives up the price on anticipation of increased actual demand for oil, wouldn't that price have to fall back down if it comes time for delivery and the increased demand for actual oil isn't there?
I don't see how speculation could, on net, affect oil price without actual demand changes.
So if speculation drives up the price on anticipation of increased actual demand for oil, wouldn't that price have to fall back down if it comes time for delivery and the increased demand for actual oil isn't there?
I don't see how speculation could, on net, affect oil price without actual demand changes.
Anon,
Please reread the sentence where I discuss this. I explicitly make your point.
Bryan, exactly. If you click on the link (in the MR post) to my earlier study for IER, I spell this point out more.
Please reread the sentence where I discuss this. I explicitly make your point.
Bryan, exactly. If you click on the link (in the MR post) to my earlier study for IER, I spell this point out more.
Done and done. I re-red (I prefer that spelling to "read", but no one agrees...) your sentence. It didn't make my point, which was that you need to distinguish *reasons* for expected price appreciation. There's a) expected change in fundamentals, and b) expected change in mania/stupidity of others.
The last sentence in your quoted excerpt does not make that distinction. Please do not claim your writings say things that are not in their text. Some of us lack telepathy. Thank you.
The last sentence in your quoted excerpt does not make that distinction. Please do not claim your writings say things that are not in their text. Some of us lack telepathy. Thank you.
# posted by : January 7, 2009 at 5:30 PM
: January 7, 2009 at 5:30 PM
I reproduce the sentence with the relevant section in bold.
On the other hand, if hedge fund managers invest in oil futures contracts not because they forecast higher fundamental demand, but rather because they are simply betting that the market value of the contracts will appreciate, allowing the hedge fund to unload the contract before physical delivery, then that is considered pure speculation.
I am sorry if the above required telepathy to see that I was making a distinction in the reasons for hedge funds buying the contracts.
On the other hand, if hedge fund managers invest in oil futures contracts not because they forecast higher fundamental demand, but rather because they are simply betting that the market value of the contracts will appreciate, allowing the hedge fund to unload the contract before physical delivery, then that is considered pure speculation.
I am sorry if the above required telepathy to see that I was making a distinction in the reasons for hedge funds buying the contracts.
You didn't give a positive example of what would count as "non-fundamental" demand; you just said what it isn't. So it wasn't "explictly" the point that I made.
# posted by : January 7, 2009 at 6:13 PM
: January 7, 2009 at 6:13 PM
Bob, under the tutelage of, first, Henry James, and later, Michael Oakeshott, I sometimes write sentences as long as that whole post!
"I don't see how speculation could, on net, affect oil price without actual demand changes."
It's called a Ponzi scheme. Of course it will collapse eventually, but that's why it creates a *bubble*!
It's called a Ponzi scheme. Of course it will collapse eventually, but that's why it creates a *bubble*!
Gene Callahan:
"It's called a Ponzi scheme. Of course it will collapse eventually, but that's why it creates a *bubble*!"
I understand the principle of a bubble. It seems to me that a multi-year bubble would not be possible with oil however. My understanding of oil futures is that they have a specified date on them. If this is the case, wouldn't any bubble have to pop by the specified date of delivery. This seems like it would strictly limit any bubble formation to that a matter of months. But I guess that depends on how far in the future they issue contracts for.
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"It's called a Ponzi scheme. Of course it will collapse eventually, but that's why it creates a *bubble*!"
I understand the principle of a bubble. It seems to me that a multi-year bubble would not be possible with oil however. My understanding of oil futures is that they have a specified date on them. If this is the case, wouldn't any bubble have to pop by the specified date of delivery. This seems like it would strictly limit any bubble formation to that a matter of months. But I guess that depends on how far in the future they issue contracts for.
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