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Wednesday, June 18, 2008

Oil Speculation

Mike Moffatt doesn't necessarily think oil speculation is a substantial cause of price hikes (or rather that a ban on speculation would necessarily reduce prices).

My response:

Mike,
That logic makes sense to me, but couldn’t it also be that global demand issues (beyond futures markets) are confounding things a bit?

UPDATE: In fact, futures speculation, in so far as it increases the expectation of future price spikes of oil in the eyes of consumers might actually be a root cause of the increase in global demand now. If people expect prices to rise a lot in the future, and they use futures markets that they hear in the news to guage this, then we would expect demand for oil now to rise.

Also, could it further be that once you add ‘time’ into the mix, that prices temporarily rise at time t as speculation occurs, then as people sell back their futures as you suggest we would expect prices to fall, but by that time the seeds of a bubble have set in causing MORE speculators to enter the market at time t+1 meaning that prices actually appear to rise continually until such time that the bubble bursts. I think that is a pretty likely scenario.

For another more detailed and thoughtful explanation of how oil speculation may be feeding a longer-termed bubble, see econbrowsers thoughtful analysis.

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