Wednesday, July 02, 2008

History's Fall Guys

Given the media and government-directed hostility toward "speculators," many people will want proof that they are innocent. Well, for the scapegoat-seeking masses, there's the following inconvenient truth: If oil were being withheld from the market by speculators, said oil would physically have to be somewhere other than on the open market where it is being sold and bought. And yet crude inventories have remained roughly constant since 1998. If someone were hoarding oil, we would have seen a spike in crude inventories.

If we can't scapegoat "speculators" for $4 a gallon gas, who can we blame? For those who really need to find a villain in this affair, there is good news and bad news. The bad news is that one of the principal causes of high gas prices will be familiar to anyone who took an introductory economics class-supply is relatively low (not to mention relatively inelastic), while demand is relatively high. That means higher prices.

But blaming the whole thing on Adam Smith's invisible hand obviously serves no political purpose. That brings us to the good news for the politicians in the audience-the other principal cause of $4 a gallon gas is the weak dollar. Because how the dollar gets strong or weak is understood even more poorly than what "speculators" do, a crafty politician can blame pretty much anyone he wants.

Weekly Standard

6 Comments:

At 7/02/2008 8:41 AM, Blogger Sophist said...

Dear Prof. MP:

Constant inventories in the face of an undisputed rising demand means that supply has increased.

I must repeat to you that rising inventories in the US are not necessary to corroborate speculation on a worldwide scale. Futures manipulation is enough to drive prices up accoridng to your equation.

From MarketWarch:

OPEC repeats claim of speculators causing record oil prices
By Steve Gelsi
Last update: 8:55 a.m. EDT July 2, 2008
NEW YORK (MarketWatch) -- Abdalla Salem el-Badri, secretary general of the Organization of the Petroleum Exporting Countries, on Wednesday reiterated the cartel's position that record oil prices are mostly the fault of speculators. "70% of crude contracts on the Nymex are held by speculators...Some form of regulation is needed," el-Bradri said at the World Petroleum Congress in Madrid, according to press reports. Tighter regulation should apply not only for oil but other commodities, he said. "The market has no shortage of physical crude," said el-Badri, who added that supply is currently higher than demand.

Story link

 
At 7/02/2008 9:26 AM, Anonymous ej said...

Sophist,

I think you could be confusing the concepts of quantity demdanded and the demand curve. Quantity supplied and quantity dmeanded will always equal each other less differences made up in inventory accumulation/depletion. The quantity supplied has only increased and the quanity demanded decreased because of the current higher price. In other words, though the quantity demanded has eased off, demand (the curve) has increased.

 
At 7/02/2008 9:34 AM, Anonymous Ridgerunner said...

I've never heard anyone (logical) complain that there is a shortage of supply. As Sophist said, supply has in fact, increased. Nor had I heard anyone (until the Weekly Standard) assert that "the speculators" were somehow hoarding oil. The ridiculousness of that concept on its surface makes me wonder if the Standard has mistakenly fired all their editors in some internal cost-cutting move.

[disclaimer - I'm a neophyte when it comes to economics, but eager to learn more]

Isn't the fundamental problem that $$ has to go to work somewhere, and in a market where every bit of news is about;

- how our supply is threatened (war, natural limits, etc.)

- consumption is on an unprecedented rise (growth of China/India, etc.)

- other investments are losing value (real estate, credit instruments, equities)


...wouldn't most any speculator (i.e. hedge fund, or asset manager) look to move cash into something that the whole market/media says is just going to keep going up in price?

Also, I'll have to go back and research the links, but I remember reading about 60 days ago that normally, commodities contracts (incl. oil) have a high volume of trading; lots of secondary and tertiary sales, etc. That there is in fact a market. But the news pointed out that untraditionally, new buyers of contracts in the market are *holding* them, and no follow on sales to better reflect true price.

So in effect, isn't what's being hoarded not the oil itself, but the commodities contracts?

 
At 7/02/2008 10:02 AM, Blogger bobble said...

"If we can't scapegoat "speculators" for $4 a gallon gas, who can we blame? For those who really need to find a villain in this affair . . . "

you want villians? i'll give you villians.

how about [supposedly smart] pro-globalist economists who forgot to tell us that there wouldn't be enough resources to go around when the whole world gets rich?

how about our [supposedly free trade] globalist trading partners that subsidize gasoline in their countries?

[and please don't drone on about not drilling in anwr and offshore US. i'm not against it, but there is ample proof that there is not enough oil there to make a differance]

 
At 7/02/2008 9:19 PM, Blogger OBloodyHell said...

> Nor had I heard anyone (until the Weekly Standard) assert that "the speculators" were somehow hoarding oil.

They aren't claiming it directly, it's inherehent in the claim -- if production isn't being lowered, then in order to jack the price greater than the difference in supply and demand would call for, you would need to actually be lowering the supply somehow, presumably by hoarding it -- putting it into storage somewhere. This would increase the difference between supply and demand and cause the price to rise.

It's actually more subtle than that, but that's the general idea.

> how about [supposedly smart] pro-globalist economists who forgot to tell us that there wouldn't be enough resources to go around when the whole world gets rich?

*sigh* bobbie

There isn't enough wood in England to take care of all the people who need wood for their stoves, either. Oh, wait. They substituted coal.

There isn't enough copper in the world to provide for all the phone wires the entire world will need. Oh, wait. They substituted fiber optics (i.e., glass) and now they're even doing away with that (cell phones).

The world's economic history is littered with resource depletions. Advances in technology and such inevitably take hold and replace one resource with another, usually much, much vaster.

It's not a zero sum game.

And if you really, really believe what you said:
"how about [supposedly smart] pro-globalist economists"
Then perhaps now you start to see why it is that smart people don't trust central planning arrangements like communism and socialism. People do a lousy job of anticipating, sometimes.

Because you might be right in arguing that they should have pushed for an expansion of resource development.

You're presuming, almost certainly incorrectly, that they didn't, however.

You recall those brownouts that hit California? The people in charge of the power industry had been telling us for more than a decade that the power grid was running too close to capacity... and that it needed to be expanded.
Guess what?
They got ignored.
And the place they got ignored the most?
Right.
California, where they'd been sucking off the excess from neighboring states for that decade and more. So when those states stopped having any excess, Cali got screwed. This is as it should be.

And people have been telling everyone that our oil refinery capacity is under what it needs to be, and that we should be developing our own sources of oil -- for over two decades, now.
They got ignored.

"You can lead a horticulture but you cannot make her think".
- Dorothy Parker -

You can have all the experts in the world telling you what to do. When your leaders ignore them, it's not the fault of the experts.

So your villains are not the experts, if anyone -- the villains operate out of a big white, domed building in Washington, DC.

And it seems rather obvious, when someone like Obama says he opposes offshore drilling and development of both ANWR *and* Oil Shales, that it's up to you as to whether the politico you vote for actually listens to experts as well as sense, or not.

> and please don't drone on about not drilling in anwr and offshore US. i'm not against it, but there is ample proof that there is not enough oil there to make a difference

I don't know what planet you are getting your information from, but it ain't planet Earth, bobbie.

The amounts there are certainly enough to -- at the least -- allow us time to adjust with less pain -- i.e., wear out existing equipment before purchasing newer, more efficient equipment.

Granted, there are still going to be idiots buying HumVees who have no need for anything bigger than a Volkswagon Beetle, but you cannot protect idiots from their own stupidity.

 
At 7/04/2008 1:51 AM, Blogger bobble said...

OBH drones on:"I don't know what planet you are getting your information from, but it ain't planet Earth, bobbie.

The amounts there are certainly enough to -- at the least -- allow us time to adjust with less pain -- i.e., wear out existing equipment before purchasing newer, more efficient equipment."

as usual, OBH, you have not backed up your long winded harangue with any proof. let me direct you to some facts.

the White House’s own Energy Information Administration [right here on planet earth] says drilling in ANWR and offshore will have little impact.

offshore: ". . .any impact on average wellhead prices is expected to be insignificant. " here

ANWR: " . . is projected to reduce the world oil price by 57 cents per barrel (1.9 percent)" here

 

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