Friday, July 11, 2008

Are oil speculators to blame?

Russell Roberts at Cafe Hayek discusses a spam email from United Airlines, which blames speculation for much of the high price of oil. Naturally, he puts on his quizzical econ spectacles and says it's like blaming a thermometer for hot weather; but maybe that's just a bit too sideways.

For isn't it interesting that in 20 years, the proportion of oil contracts purchased by middlemen who don't deliver, has risen from 21% to 66%?

And isn't there a big Space Hopper of excess liquidity squmphing around the world's markets and destabilising them, as Dr Marc Faber claims? Indeed, Faber has spent years making money from predicting the future movement of this excess. In an interview on "Financial Sense" on January 12, Faber said:

... we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not.
I suggest that now that the Space Hopper has been punctured, the speculators riding it have been squmphing around even faster, trying to visit as many markets as they can before their toy goes totally flat.


TBRRob said...

Oil prices have little to do with supply and demand.

It all has to do with inflation, speculation and taxation.

And most of this is the result of poor government policy in the UK and US.

Nick Drew said...

almost 180 degrees in the wrong direction IMHO, tbrrob !

the absolute level of oil prices is a function primarily of supply & demand

volatility is a function of liquidity - but (a) illiquidity is a much greater evil, as anyone trying urgently to exit an illiquid position will agree (b) the very liquidity itself brings about the capability readily to hedge against the volatility - the more liquidity, the cheaper the cost of hedging

I can point to eras of hugely increasing liquidity that have been coupled with falling commodity prices, (and not for reasons of speculative shorting)

liquidity in fact makes the influence of S/D more quickly (and acutely) felt

Lord James Bigglesworth said...

It's not speculation - it's cartel price fixing, both in OPEC and elsewhere.