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Saturday, June 28, 2008

A Clarification on My Views On Oil Prices

OK I have been going nuts over the Krugman/Cowen/Kling brouhaha. My overarching complaint is that such high-caliber economists keep talking past each other because they aren't defining terms and then being consistent. So you've got, for example, Kling proving that "speculation" about the nature of the universe always determines prices, and of course anyone who subscribes to subjectivist price theory agrees with that. But naturally that's not what Krugman and Congress are talking about.

On the other hand, it does seem a bit crazy to say that oil has shot up so much in just a year, and this is all due to "fundamentals." Is that really what I'm saying?! Three points:

(1) From mid-June 2007 to mid-June 2008, fully 15% of oil's tremendous nominal price jump can be explained by the dollar's fall against the euro. So right there I just took care of 15% of the issue.

(2) China has been growing like gangbusters. Estimates vary, but people think they are accumulating diesel so that they can turn off their coal-fired power plants a month before the Olympics (to reduce air pollution). So yes that's "building inventories" but it's not for speculative price appreciation, it's because they need to physically consume it very rapidly in the near future. The larger point is, global demand for crude oil is rising. We only rule out a "fundamentals" explanation because our way of life is fairly stationary right now, but it isn't around the world.

(3) There have been all sorts of supply disruptions and faster-than-expected declines, e.g. Nigeria and Mexico, and a lot of this stuff happened fairly recently.

In conclusion, the only real wild card in this is Saudi Arabia. If they thought oil prices were going to explode in the future, then they could be producing less now, and you might call this "speculation." That's fine. But it's NOT being driven by people dabbling in the futures markets, since there has been backwardation (higher spot than futures prices) for large portions of the runup.

OK, so it is possible that there is a "speculative bubble" in oil prices, but if so it's due to producers' misjudgments, not to institutional investors throwing money after oil.

11 comments:

  1. Richard Face2:29 AM

    Are you having of a manic episode or trying to detox?

    ReplyDelete
  2. Or are you just speaking truth? (A possibility Mr. Face apparently discounts.)

    ReplyDelete
  3. richard face3:53 AM

    I was just commenting on Bob's rapid fire posting so late at night. Every time I checked back to see the comments there would be a new post. I wasn't trying to disparage the content of his posts.

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  4. Oh, well some days the only time I can really sit and read MR posts etc., and then offer reactions, is late at night.

    And I had been shooting off a bunch of criticisms so I wanted to take a step back and explain that it was mostly the sloppy use of terms that was bothering me.

    It's sort of like my arguments with Paul Craig Roberts and Peter Schiff. Obviously they were right about "the US is scr*wed," but I didn't think their theoretical explanations were very good.

    So same thing here. I wanted to clarify, in this latest post, that I wasn't ruling out the possibility that, say, oil prices are in a bubble.

    I was just saying if they are, it's not because of speculators.

    If oil is trading at $50 (in 2008 dollars!) in three years, that wouldn't stun me. If they open up ANWR and OCS, and no CO2 legislation gets passed because of lobbyists etc., then I think oil prices could very well plummet in a few years.

    So at that time, I don't want people saying, "Wtf! I thought you confidently claimed they were staying high forever because of fundamentals!!"

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  5. Anonymous1:36 PM

    What do you think of the notion that much of the money the fed has loaned to Wall Street banks has been finding its way into the hot sectors namely commodities? According to this view the big banks won't be loaning the new funds to corporate America or Uncle Sam but to buy what is going up.

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  6. Anon,

    Yeah that's kinda what worried me about my earlier posts, and why I made the present clarification. It certainly seems plausible that the Fed is causing another bubble, not in tech or housing this time, but commodities.

    But again, I can't understand how this could be consistent with long periods of backwardation and no inventory accumulation.

    E.g. housing prices had been shooting up in 2002-2005, but nobody was buying houses except to live in or fill up right away with renters, then I would be harder pressed to recognize it as a bubble. (That's not what happened, of course, and so the housing inventory data are totally consistent with the bubble thesis.)

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  7. You forgot:

    4) Oil has no cost to the environment, and any attempt to assign this cost to those who burn it, is "fake scarcity".

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  8. Silas:

    Can you explain the relevance of your criticism of my other article to the present post?

    If you're saying oil has gone up in the past year because people are expecting CO2 legislation, OK that might make sense.

    But I suspect that's not what you're saying.

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  9. I'm saying there's a slight discount in the price of oil due to expectations of restrictions in its use.

    But more importantly, I'm saying you made a pretty apalling error that you've never issued a correction for in any of the places where you originally promoted it, and this calls into question your understanding of basic economic concepts.

    ReplyDelete
  10. It's so nice to see someone pestering Bob for a change.

    ReplyDelete
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