How Much Are Speculators Responsible For Oil's Run Up?
Tuesday July 1, 2008
Garth Brazelton on oil speculation:
Speculators could certainly drive up the price of commodity futures - no questions there and I believe to some extent they have been, due to overly loose monetary policy and the poor recent performance of other vehicles for investment (neither stocks nor real estate look particularly appealing right now).
But for that to have anything more than a momentary blip on spot prices, you need to have a second set of actors involved - ones that are willing to store oil, other above ground or below ground through reduced production. Otherwise there is no transmission mechanism leading the price of futures to spot prices.
So while speculators can play a role in changing prices, they, by themselves, are not a sufficient condition for doing so.
Both Paul Krugman and Alan Reynolds (and Mike Moffatt) don't believe oil specualation is significantly driving prices.Garth is referring to my article Would Oil Prices Continue to Be So High If We Got Rid of All the Speculators?. But the argument I made is a little more subtle; speculators, could in fact, be a significant driver of higher oil prices:
Last week I made the argument that it could be, in so far as more and more speculators enter the market (as perhaps measured by increasing volume of "buys" in the oil futures markets).
Speculators could certainly drive up the price of commodity futures - no questions there and I believe to some extent they have been, due to overly loose monetary policy and the poor recent performance of other vehicles for investment (neither stocks nor real estate look particularly appealing right now).
But for that to have anything more than a momentary blip on spot prices, you need to have a second set of actors involved - ones that are willing to store oil, other above ground or below ground through reduced production. Otherwise there is no transmission mechanism leading the price of futures to spot prices.
So while speculators can play a role in changing prices, they, by themselves, are not a sufficient condition for doing so.
Comments
Speculators are an interesting breed. I agree that speculators alone do not control the prices. However, if you throw in speculators pushing prices around and businesses in the middle buying what they “need” at whatever the market price is set to, for a short time, speculators can have a significant impact on price.
As a forex trader, I always watch all the markets and you can almost see speculative money moving from one thing to another from the top view. The most interesting thing is to watch what happens as speculators leave a market.
As long as there is someone to buy the commodity at the elevated price caused by speculation, no problem, except to the consumer.
The housing bubble, which was caused in large part by speculators flipping houses with little or no real money invested, eventually burst. Leaving the rest of the world holding the bag for the current banking mess.
The oil bubble, which is also caused in part by speculators bidding up the price of oil, could also burst if there was a significant drop in oil demand. If that happened, what effect would it have on the world? Do we really know who is holding the bag?
We did not know all the people involved in the housing mess until the bankruptcies stated.