But the whole talk of speculation, in general, smacks of a desperate attempt to blame some nasty intervention by evil players for oil prices (which would otherwise be 'normal' and all could go on as before) rather than fundamental changes that will require us to actually change our behavior significantly. In the long run, we're all dead. John Maynard Keynes
I think the kind of structural speculation Chris is describing is much more likely.
Don't forget that gas prices miraculously dropped in the run up to the 2004 election, and started picking up soon after. So I think we can take market manipulation for granted. And given that prices are partly based on futures, it has to be entrenched and systemic manipulation.
So if the 'physical price' - which is an odd concept - is being set deliberately by systemic manipulation, it becomes an input and not an output variable. Prices will stay high because the monopolists want them to, and 'physical price' becomes an irrelevance.
When the casual speculators are getting burned for underestimating the price, it's unlikely their kind of speculation is important.
I'm agnostic about what types of speculation are driving things, but lets not pretend that this is all just about simple demand and supply.
lets not pretend that this is all just about simple demand and supply.
On whose side should the burden of proof be? In the long run, we're all dead. John Maynard Keynes
On the other hand, Jerome rightly points out that on more than one occasion a rally has been caused by speculators rushing out of big bets that the price will go down. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
This is definitely not what is happening with oil and commodities. In the long run, we're all dead. John Maynard Keynes
There is a big element of denial here in the attempt to blame "speculators".
Clearly we are seeing a "phase transition" here - and accompanying turbulence - in a move from a structurally over-supplied "buyers' market" to a structurally under-supplied "sellers market".
But don't forget that while the sell side have an interest in higher prices, and the buy side in lower prices, the trading intermediaries make more money from high prices (assuming constant margins) and also have an interest in market volatility (where they profit at the expense of hedgers).
So I think the tendency will in future always be towards excessively high prices, with occasional lurches back to the "reality" of the "true" market clearing price whatever that is.And never ending excessive volatility of course.
We need to entirely reconfigure - and dis-intermediate - global markets, and such dis-intermediation is a logical consequence of the Internet in any case.
This would mean a transition - which is already visible - of oil companies to service provision.
It would also mean a market architecture where speculators and intermediaries are structurally unable to participate in physical market price formation.
I believe that this is possible too, and it would involve a market where "deficit-based" time constrained (ie dated) futures contracts are superseded by new forms of (undated) "asset-based" security. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
