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Monday, June 23, 2008

Murphy Twin Spin on Oil

Here is an Buffalo News op ed (that is a bit clunky in parts because of the editing process) on why oil prices are so high, and here is an IER study debunking Michael Masters' testimony about speculators causing price hikes.

5 comments:

  1. Let me beat Silas to the punch:

    (1) In my op ed I make it sound as if oil prices just recently broke $130. The answer is that I wrote that piece a while ago, and it just now got picked up. We at PRI will work to avoid such mishaps in the future.

    (2) More serious, I say speculators cause oil prices to rise in the op ed, and then deny that they have anything to do with it in the IER piece. What gives?

    The answer is that in the first piece, I was explaining the various things that affect oil prices, and why those are all "correct" influences and we need those prices to be high. E.g. when Hugo Chavez says Bush is a punk, it makes sense that oil jumps a buck.

    However, when it comes to empirically investigating how much of oil's rise is due to various factors, I now think that speculators don't really have much to do with it at all.

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  2. I think a working definition of 'speculator' might be helpful. I don't even really think they exist if it means someone "speculating" on future prices going up or down...I could call these people investors because they have a _logigal_ (rational) reason for doing it. I guess I have always thought of speculators more as rolling dice or using technical analysis (charting).

    What is a damn speculator? Many of these guys are just hedging...

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  3. You're right, Pepe, that a lot of people are throwing around "speculator" and I don't think they could even provide a working definition.

    In this context, I was using speculator to mean an investor who doesn't have any intrinsic tie to the commodity, except that he believes its price will go up.

    So an airline buying an oil futures contract isn't a speculator; it is hedging.

    If someone who works in the Defense Department sees Iranian warships practicing more than normal, and so he goes and puts $10,000 in oil futures, then he is clearly a speculator.

    A borderline case is, say, a retirement fund (if this is legal?) allocating x% to a commodity index. You could say this isn't speculation, but hedging, because the fund is guarding itself against a poor return on stocks and bonds.

    On the other hand, the fund manager is clearly motivated by a belief that the prices of the commodities will rise.

    However, as I think you are pointing out, we don't normally say that a retirement fund manager is "speculating" in stocks if he buys some SPDRs. In that case he is just capturing exposure to the S&P 500; I guess he is "speculating" that stocks will outperform motorcycles or baseball cards, but that is stretching the normal usage.

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  4. Silas5:15 PM

    Actually Bob (rm'd the underscore just for you this time!), I'm way too clever for that. My response was going to be much, much more annoying. I would have said something like,

    "Hm, *skim*, hey Bob_Murphy, I can't quite seem to find the correction you were going to issue in a future work for completely botching the whole concept of scarcity. Someone hack the websites?"

    But luckily I wasn't interested enough ;-)

    ****

    What about the distinction between someone who buys in the belief that the fundamentals have changed vs. someone who buys in the belief that other investors will get even stupider?

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