Thursday, August 21, 2008

Speculation in the oil market

As a follow-up to my previous posting on speculation (a.k.a betting the farm on a hope and a prayer), the world learned a little bit more about how much oil speculation was driving prices ( See the true story here.)
Today's news came one month after the U.S. Interagency Task Force on Commodity Markets released an interim report saying record oil prices were the result of fundamental supply and demand factors. The Commodity Futures Trading Commission made an unusual request last month for data from Vitol Group, a private Swiss energy company that regulators thought was helping industrial firms get the oil they needed, according to The Washington Post. The commission discovered, however, that the Vitol would be better described as a speculator, trading oil contracts to turn profits rather than assisting companies that actually needed oil delivered for their operations ( CNN Money).

So what is the big deal? Well, think "Dot-Com Bust" or the story of how one natural gas trader lost $3 Billion on price speculation (his punishment: he got fired and had to take his $100+ million he made in the previous year from bonuses because he was such a good speculator ...).

Speculation can create asset bubbles - large run-ups in asset values that quickly fall; taking huge amounts of wealth to the grave in the process. Even if there is never a bubble, it can create wild swings in prices. Most importantly when we are taking about oil or rice, the price acceleration hurts some of the poorest people on the planet and it often wipes-out the wealth (sometimes the cash socked away for retirement) of those who had nothing to do with the decisions that were made (just ask the employees of Bear Stearns).

Comments? Thoughts? Additions? Anything going on up there? Does anyone read this thing?


Anonymous said...

Check this out:

(James Hamilton's blog - yes, *that* James Hamilton).

James. (not Hamilton)

Anonymous said...

I think the volatility in the price of oil is due to it's scarcity and current uncertainty of the supply/demand situation. It's characteristic of Peak Oil. I'd bet on oil approaching record prices again in Sept and October.

Pemex production for July fell 12% year over year. That's America'a 3rd largest producer. Mexico will be a net importer by 2010

Canadian Economist said...

I appreciate your comments. There are both very interesting articles.