Summary:
James Surowiecki believes speculators are being used as the scapegoat for high oil prices because the real reasons are either out of their control or are not palatable in an election year. Speculators could in principle directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, but a look at oil inventories shows no sign that this is happening. The real reasons are simple: boom in global demand, the inaccessibility of certain oil fields, prospect of war in the Middle East, our dependence on foreign oil and the weak dollar. In addition, "shortage psychology" plays a role: the price of oil isn’t based solely on current supply and demand, but also on people’s expectations about future supply and demand. This is not sinister speculation, but people's current reading of the future. (Published: 07/07/08)
Notes:
- Senator Joseph Lieberman: "Excessive market speculation has inflated the price of oil and other commodities beyond reason"
- Curb speculation, as a raft of proposed laws intend to do, and oil prices will soon return to earth.
- but: speculation has been a favorite target of politicians looking to mollify anxious voters since the time of ancient Greece
- orator Lysias protested that wheat traders had reduced Athens to a “state of siege.”
- suspicion not unreasonable: the past century is full of examples of avaricious selfishness leading to the manipulation and corruption of market
- In the twenties, speculators banded together in “stock pools,” trading a particular stock among themselves to create the illusion that its value was rising
- in March, 1929, a stock pool succeeded in pushing up RCA’s stock price by almost fifty per cent in less than two weeks—and then dumping the stock when outside investors bought in
- In the late seventies, a speculators’ pool led by the Hunt brothers mounted an attempt to corner the world’s silver market
- at one point controlled an amount equivalent to an entire year’s global production
- However: there’s little convincing evidence that the oil market is being significantly manipulated
- Whatever chicanery is occurring—and we can assume there is some—has only a marginal effect on prices at the pump.
- Congress is not just attacking illegal market manipulation, it’s also taking aim at perfectly legal speculation
- i.e. the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down)
- Futures contracts: oil sellers and buyers
- futures contracts can be used by oil sellers (like OPEC ) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price.
- Futures contracts: speculators
- mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil
- These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil.
- That’s set by the people who are buying and selling actual barrels of petroleum.
- Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.
- If speculators aren’t at fault, why have oil prices spiked so high?
- Fundamental reasons not hard to find:
- Between 2000 and 2007, world demand for petroleum rose by nearly nine million barrels a day, but OPEC has been consistently unable, or unwilling, to significantly increase supply, and production by non-OPEC members has risen by just four million barrels a day.
- The prospect of military action against Iran, which would disrupt global supply, seems greater than it did a few years ago.
- And the plunging value of the dollar has meant that the cost of oil has jumped more in the U.S. in the past year than it has in countries with healthier currencies.
- Another reason: “shortage psychology” (oil guru Daniel Yergin)
- The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand.
- It’s also based on people’s expectations about future supply and demand,
- because those expectations determine whether it makes sense for oil producers to sell their oil now or leave it in the ground and sell it later
- Currently, the market is assuming that oil will become scarcer, and that global demand will keep rising,
- especially in rapidly developing countries like China and India. As a result, producers are asking very high prices to pump their oil.
- it could be that these assumptions are all wrong
- i.e. that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand.
- In that case, oil would turn out to have been hugely overpriced.
- But that won’t be because of sinister speculators;
- it will be because oil producers and oil users collectively misread the future.
- difficulty for Congress is that none of the problems that have driven up the price of oil lend themselves to a quick fix
- most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all
- makes speculators a perfect target:
- by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans.
- Our dependence on foreign oil, together with the fiscal fecklessness that has helped reduce the value of the dollar, means that there is no easy way out of where we are.
- in an election year that’s hardly a message that anyone in Washington is going to deliver
