I certainly hope that one of the first things President Obama does once in office is reward speculators for the fine job they're doing lowering the price oil. At the time of this writing, oil was trading below $60 per barrel. Just weeks before oil peaked around $145 in July, Lauren and I took it on the chin driving across the country in a moving van, dragging a jetta. The 2200 mile trek cost us $1100 in gas alone. Could that money have been better spent elsewhere? Of course. Was I happy about paying $4 per gallon all the way from Maryland to Utah? No. But I wasn't jumping on the bandwagon hell-bent on throwing a windfall-profits tax at Big Oil or using tremendous amounts of public money to "invest" in alternative energy. Many even went so far as to demand that the CFTC temporarily ban the practice of speculating in oil futures, claiming that these investors were responsible for the quickly rising price.
The argument goes that as the price of oil was rising, "everyone knew it" and speculators were creating an artificial demand for futures contracts that was causing the price of the underlying commodity (oil) to go up. I don't have the disposition nor the time to go into all the reasons why this theory is wrong, but suffice it to say that in any market, transactions never take place if "everyone" knows the price is rising (Who would be selling these contracts, knowing that the price would rise the following day?). Even so, speculators were scapegoated, even by certain "experts", and the media was all in with a 2,8 off-suit like they always do. Refreshingly however, John Stossel told Bill O'Reilly in an appearance on The Factor that if speculators can make the price rise too quickly, they must make it fall too quickly, too - they can only help it on the downside, as well. And he's right. But needless to say, that bit of honesty was of little interest to Mr. O'Reilly; the price of oil was rising then, and that's all anybody seemed to, or was told to, care about.
But here we are, 5 months later, and what do we hear about energy prices and the whereabouts of the evil speculators...(hear crickets chirping ever so softly)... nothing! Could it be that oil prices have been falling, even though wicked speculators want them to continue their rise? Now, it seems, "everyone knows" something else - that prices are falling as sharply as they rose. Per the theory espoused by the media, speculators have been and are making the price of oil lower than it otherwise would be. Thanks guys! But is the media singing their praises? Not to my knowledge. Remember, if it bleeds it leads and if it's sound economics, it isn't fit to print. And what about the "end of cheap oil" everyone was sure had arrived? (everyone since Jimmy Carter in 1978. I'll also add that the day I graduated from high school, in 1999, oil closed at $11 per barrel).
All the experts were sure $200 oil was just around the corner. Jerry Taylor of the Cato Institute was the only guy with the presence of mind to remind us that if everyone thinks that the price of something will rise to X at some specific point on the future, its price will be X already. I was intrigued but not entirely surprised when he said bluntly that $75 oil was just as probable as $200 oil. 5 Months later and were seeing that the "experts" are unable to forecast oil prices. These are not the people we want crafting a comprehensive energy policy will our money. But more on that later...
The argument goes that as the price of oil was rising, "everyone knew it" and speculators were creating an artificial demand for futures contracts that was causing the price of the underlying commodity (oil) to go up. I don't have the disposition nor the time to go into all the reasons why this theory is wrong, but suffice it to say that in any market, transactions never take place if "everyone" knows the price is rising (Who would be selling these contracts, knowing that the price would rise the following day?). Even so, speculators were scapegoated, even by certain "experts", and the media was all in with a 2,8 off-suit like they always do. Refreshingly however, John Stossel told Bill O'Reilly in an appearance on The Factor that if speculators can make the price rise too quickly, they must make it fall too quickly, too - they can only help it on the downside, as well. And he's right. But needless to say, that bit of honesty was of little interest to Mr. O'Reilly; the price of oil was rising then, and that's all anybody seemed to, or was told to, care about.
But here we are, 5 months later, and what do we hear about energy prices and the whereabouts of the evil speculators...(hear crickets chirping ever so softly)... nothing! Could it be that oil prices have been falling, even though wicked speculators want them to continue their rise? Now, it seems, "everyone knows" something else - that prices are falling as sharply as they rose. Per the theory espoused by the media, speculators have been and are making the price of oil lower than it otherwise would be. Thanks guys! But is the media singing their praises? Not to my knowledge. Remember, if it bleeds it leads and if it's sound economics, it isn't fit to print. And what about the "end of cheap oil" everyone was sure had arrived? (everyone since Jimmy Carter in 1978. I'll also add that the day I graduated from high school, in 1999, oil closed at $11 per barrel).
All the experts were sure $200 oil was just around the corner. Jerry Taylor of the Cato Institute was the only guy with the presence of mind to remind us that if everyone thinks that the price of something will rise to X at some specific point on the future, its price will be X already. I was intrigued but not entirely surprised when he said bluntly that $75 oil was just as probable as $200 oil. 5 Months later and were seeing that the "experts" are unable to forecast oil prices. These are not the people we want crafting a comprehensive energy policy will our money. But more on that later...
2 comments:
Yep, I paid $1.93 a gallon on Friday at Costco! You need to run for office Taylor, you've got my vote!
Bud:
It is possible that the flow of capital from speculators did steepen the demand curve, making both the rise and fall in prices more rapid?
Great paper
Paps
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