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Why oh why, etc.
The WaPo web site headline is "Few speculators drive vast oil trading market". How about "influence" instead of "drive"? The inside heading switches to the word "dominate" instead of either. There is lots of talk about financial firms comprising a large share of the trading but never a consideration of the significance of the net position of those firms.
Posted by Tyler Cowen on August 21, 2008 at 09:19 AM in Economics | Permalink
Comments
A simple explanation is always the lazy minds solution, for the simplest way to beleive something you need to understand. Most people realize that they need to understand what is happeneing to oil prices, and they dont have the time to invest in a complex but realistic perspective, and so they opt to believe the simplest solution they can understand. Viola!!! those pesky ****** are at it again...fill in speculators for this particular problem. Read Naomi Klien (at your own risk for gnashed teeth), who has mastered this technique.
Posted by: nyongesa at Aug 21, 2008 9:46:33 AM
I also noticed that on the front page it's all about speculators driving the price of oil up, you have to get to today's WaPo business section to find that the price of oil is down 20% in the last six weeks.
Posted by: Alex Tabarrok at Aug 21, 2008 10:11:21 AM
Tyler, go post a comment to the article and point them to the right info!
Posted by: ckstevenson at Aug 21, 2008 10:18:05 AM
You beat me to it. Can't we take 30 seconds to celebrate all the speculators who got their milkshakes drained in the past month and a half before we rag the other speculators?
I keep my eye on Klein.
She doesn't like Disney world. On "The Corporation" she was talking about how you might "holiday" at the park. She's not from Europe, so I tried to figure out what Canadians say.
From ye all knowing Wiki for holiday...
"Canadians often use the terms vacation and holiday interchangeably when referring to a trip away from home or time off work."
She's got plausibility on this one, although if she had a choice, and wanted to sound more American than Eropean, should would have chosen differently, so I'm still watching.
Posted by: Andrew at Aug 21, 2008 10:22:53 AM
occam's razor makes the cutting clean?
Posted by: james at Aug 21, 2008 10:27:32 AM
Yes, just a few weeks ago, these all-powerful speculators were driving up the price of oil to extract obscene profits from the end users. I even got a shrill e-mail from Delta Airlines asking me to do something or other about oil price speculation (a copy of the letter is here. Can you count the many fallacies?).
What I would like to know is, what changed? All of a sudden the price of oil is falling as fast as it rose, and I'm beginning to think I may see gasoline below $3 a gallon by September. Did the speculators suddenly lose the ability to control world oil prices? Did their foot slip off the accelerator or something?
Or was the whole campaign against the speculators just a bunch of BS?
Posted by: John S. at Aug 21, 2008 10:32:42 AM
influence "the act or power of producing an effect without apparent exertion of force or direct exercise of command b: corrupt interference with authority for personal gain"
given the second part of the definition of influence as corrupt interference for personal gain are you sure that using influence rather than drive would be an improvement.
Posted by: spencer at Aug 21, 2008 11:09:02 AM
What is the net position of these firms?
The article does not say.
Do you know?
Posted by: spencer at Aug 21, 2008 11:10:36 AM
The net long/short position is irrelevant, what is relevant is how badly the longs want to be long and the shorts want to be short, and that is based on their expectations about how both the dollar and oil will behave in the future, as well as any surprises about how it is behaving in the present.
John S.: what changed? All of a sudden the price of oil is falling as fast as it rose..
What changed is that long-term inflation expectations for the dollar over the last month have decreased slightly, just as they have been increasing gradually over the last few years. A (currently dominant) component of oil, gold, and many other commodity prices is an exponential function of these inflation expectations. When dollar inflation expectations move slightly most dollar commodity prices move dramatically.
The variability of floating currencies is why since the dollar floated dollar commodity prices have been more volatile and have over longer periods tended to move together, which means over the last five years rising together. Commodity prices have risen broadly and dramatically up to this month not because commodity fundamentals have been miracously hit with a hundred different plagues, all of them just happening to drive up the price of a commodity. And they have fallen this month not due to a diety who has miraculously decided to stop and reverse all these plagues. The main cause, rather, lies in what these commodity prices share in common, namely the dollar.
Speculators have the best information about what kind of monetary behavior to expect, and thus about how much inflation to expect, but oil producers aren't completely ignorant of such things, so all the speculators do is make the inevitable price rise or fall occur more quickly. They have been (until the most recent month) the bearers of bad news, and we love to shoot the messengers, to treat the symptoms rather than doing the hard work of diagnosing and treating the disease.
Posted by: Nick at Aug 21, 2008 10:16:10 PM
You guys are right...in fact, I haven't even thanked my speculator today!
Posted by: mxq at Aug 21, 2008 11:21:49 PM
Snarky-ness aside, why are there so many specs raking in so much in excess returns? Vitol rung up $100bn per annum in revs according to the Wapo-- 40% more than ConocoPhillips made in 2007...25% more than ChevronTexaco.
Why are so many specs (80% of contracts...?% on the ICE) allowed to prosper?
Posted by: mxq at Aug 22, 2008 12:01:03 AM
Not all libertarian economists agree that speculators didn't have a big impact on the surging price of oil in late 2007 and into the late spring of this year . . . yes, not even a free-market enthusiast and follower of Ayn Rand like Alan Greenspan, who (let us say)has access to more reliable information about what goes on in oil market forwards and inventories.
See Greenspan's recent interview in the Financial Times: http://www.ft.com/cms/s/0/823fc3a4-673a-11dd-808f-0000779fd18c.html
And please, no rush by others citing this or that dead Austrian economist to prove that Alan Greenspan is really only a free-market Trojan Horse, out to destroy the value of the US$. Weightier analysis would be much more to the point as a way of refuting Greenspan's views --- doubly so, I add, since the major Persian Gulf oil-exporting countries are led by systematically corrupt gangster-regimes whose leaders lie through their teeth when it suits their interests . . . including production output and sales. Whether the big oil companies might or might not connive willingly in any deception (if it occurs) is another matter, about which we can only, ahem, speculate.
Michael Gordon, AKA, the buggy professor
Posted by: gordonm40@cox.net at Aug 22, 2008 2:04:54 PM
The regulators' and most commentators' definition of "speculator" is so broad as to be useless. It includes investment funds hedging their portfolios against inflation and middlemen as well as people who are just buying and selling because they know or think they know where the price will go.
To all those kvetching about the speculators, can you tell us specifically who you are complaining about and how you think their specific activities drove up prices? I have yet to hear a credible argument as to how they are damaging the commodities market. I'm inclined to agree with Nick that inflation expectations are the main cause of correlated commodity gyration. Speculators like Vitol are successful because they figured it out first.
Posted by: JohnBon at Aug 22, 2008 3:23:11 PM
"can you tell us specifically who you are complaining about and how you think their specific activities drove up prices"
No! And that's the problem. Total opacity. Nobody requires anybody to reveal the who's and why's -- For example, if you can find me the commitment of traders report that reports "index investors" for oil and nat gas, I'll buy you a steak dinner.
Posted by: mxq at Aug 22, 2008 4:41:32 PM
This is not even the worst WaPo mistake today. As Tanta pointed out, they called Alt-A 'all-day'. And despite nearly every single comment on their own website pointing out the mistake, it's been there for about 24 hrs now.
Posted by: Kolohe at Aug 23, 2008 1:11:46 AM
