On speculation, which I continue to think plays only a minor role in current prices. Krugman explained it a few days ago almost exactly along the lines of my earlier post:
Quote:
First of all, I don’t have a political dog in this fight. I’m happy to believe that crazy speculation distorts markets. And I do think it’s likely that oil prices will come down, for a while, once consumers have a chance to respond more fully to high prices by changing their driving habits, switching to smaller cars, etc..
But the mysticism over how speculation is supposed to drive prices drives me crazy, professionally.
So here’s my latest attempt to talk it through.
Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?
The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.
Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.
Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.
As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.
And here’s one more fact: by and large, futures prices over the period of the big price runup have been slightly below spot prices. The figure below shows monthly data from the EIA; as the spot price shot up, the futures price (that’s contract 4, the furthest out) actually lagged a bit behind. In other words, there hasn’t been any incentive to hoard.
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And for those who like theoretical models, there's a brief paper here:
http://www.princeton.edu/~pkrugman/S...Signatures.pdf
Roach: on the issue of infrastructural change and the need for policy direction, I am entirely in agreement. We are seeing some shifts in demand in the US - metro-rail systems are more frequently used than in many years, and bicycle shops are reporting that they are moving bikes so quickly that they can barely maintain their stock. Still, I am pessimistic that you can simply rely on the individual consumer pain of high prices to force really large-scale shifts in patterns of residence, distribution of businesses, etc.
I actually ride my bike to and from work now instead of taking the metro - a cool 7 miles each way, it is a wonderful way to start the day - and I am lucky that most of that distance is covered by a great bike trail, it feels a lot like a highway for bikes, complete with walls and guard rails on either side, on-ramps and off-ramps, exit signs, and a big yellow dividing stripe down the center of the path. I wonder what kind of investment it would take to ensure that all major urban areas are criss-crossed by a network of similar highway-quality bike trails. It doesn't seem any more infeasible than the equally impressive system of highways that we built in the 20th century.