Oil price speculation

by on July 10, 2009 at 12:13 pm in Economics | Permalink

There's lot of talk about curbing speculation in energy markets.  Simon Johnson has an excellent post on this topic:  He writes:

1) They are trying hard to talk up the market, with regard to global growth.  At the same time, the hard data continue to disappoint.  Naturally, this causes volatility in oil prices.

2) They claim to see no link between their failure to converge on
climate change/environmental policies and what happens to energy
prices.  The extent to which industrialized countries’ effectively
control carbon emissions will have a big impact on the longer-run
demand for oil.  Flip-flopping on this issue discourages investment in
the energy sector (regular and alternative), and thus directly and
indirectly contributes to oil price volatility.

3) The very cheap money policies of leading central banks, including
the Fed, the Bank of England and arguably also the European Central
Bank, lower the funding costs for big players who want to take large
positions in commodities markets.  Essentially, we are providing the
credit that makes big speculative positions possible.  Add to this mix
a “too big to fail” attitude and a “yes we can, recapitalize through
trading profits” deal with policymakers, and you see why major
financial firms are likely to place huge commodity bets in the months
ahead.

…The true speculators here are your elected representatives.

mulp July 10, 2009 at 12:42 pm

Should the price of oil in 2050 or 2100 be incorporated into today’s price of oil?

Is the future going to be Mad Max or Star Trek?

E. Barandiaran July 10, 2009 at 1:07 pm

Tyler,
SJ’s post is not about price speculation. It’s about his disappointment with politicians. He blames them for his disappointment, but he has done enough research on development to know better. Furthermore, he mentions only non-US politicians and I wonder if he’s looking for a position in the BHO administration.

spencer July 10, 2009 at 1:23 pm

Of course the price of oil in 2050 or 2010 be incorporated in today’s price of oil.

Tell me, how do you estimate the 2050 or 2010 price of oil?

You check on the futures market.

Right, but doesn’t this mean you are just running around in circles.

Even the major oil companies do not do that.

Over the last few years their basic assumption for future exploration and development budgets assumed something like $30- $40 oil even when the spot price was over $100.

mulp July 10, 2009 at 3:21 pm

@mulp: “Should the price of oil in 2050 or 2100 be incorporated into today’s price of oil”

It is, automatically!

So, Mad Max is the future.

How depressing.

charlie July 10, 2009 at 3:54 pm

funny, I though oil prices were a way to hedge against weak US dollar positions. Who knew it was politicians?

Geoff NoNick July 10, 2009 at 10:02 pm

The answer, obviously, is to establish a market in derivatives swapping risk caused by speculation… right?

Yancey Ward July 11, 2009 at 1:02 pm

Government officials are getting very, very annoyed that speculators are choosing to invest in commodities rather than government bonds, corporate bonds, mortgage-back securites, and stocks.

Rob July 11, 2009 at 8:15 pm

Spencer, it is not true that there were not major oil companies last year using oil at $100 for SOME of their projects. When the price dropped, frantic changes in plans were made. I would be willing to call that irrational behavior, but… you know.

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