Oil, Inventories, and Bubbles

Bryan Caplan

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Krugman says that since we're not building up inventories, the high price of oil isn't a bubble:

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding -- an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

But it hasn't happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels.

Last week I met a very sharp retiree from the oil industry who told me that oil inventory numbers have become meaningless because non-traditional firms that don't count in standard statistics are building storage tanks at maximum speed. He seemed to know his stuff, and I certainly consider an experienced petroleum insider more reliable on this point that a jack-of-all-industries guy like Krugman. Does anyone who knows a lot about this want to weigh in?

HT: Tyler

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The author at Jim's Blog in a related article titled Exxon blows it. writes:

Bryan Caplan wonders if oil prices are a bubble. When oil spikes abruptly, that means people made incorrect investment decisions - under invested in exploration, development, and gas to liquids conversion. A simple back of the envelope calculation tell... [Tracked on May 14, 2008 4:43 AM]

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Latest Comment

Matt writes:

I was a little confused by Paul also, because we have inventory storage when we leave it in the ground. Oil producers are speculating.

Posted May 13, 2008 12:29 PM

Lord writes:

If a billion barrels represents a 90 day supply, inventory is pretty meaningless as a means of speculating, but if you were, you would certainly do that little bit as well. And the reason that non-traditional firms would not use the traditional firms for that first would be..? They may not even be speculating as such but assuring supplies for their own personal use.

Posted May 13, 2008 12:50 PM

Stephen W. Stanton writes:

Some of the largest owners of physical oil are investment banks. They use their proprietary knowledge of the markets and their vast inventory to profit.

I am no longer in one of those banks, so I can't say whether they are actively selling vs. actively buying. I will say that a lot of physical oil storage does not show up in statistics. I don't think that the total stockpiles would be enough to drastically move prices for too long. (Flows are vey high relative to stocks.)

One thing to note... Everyone is actively hedging. Airlines, transport companies, utilities... They don't want to risk volitility in their fuel costs (or their output prices in the case of power generators). Not too many big industrial players buy in the the spot market. Not sure how that distorts the shrt term price movements... Especially when everyone is more risk averse than ever w/ respect to further price spikes.

Posted May 13, 2008 1:05 PM

reason writes:

Leaving oil in the ground isn't speculating, its managing an asset.

Posted May 14, 2008 10:07 AM

fundamentalist writes:

I don't know how industry data on inventories is collected; it may be just from the majors. But I know that all oil in the US is priced with the stipulation of delivery to Cushing, OK. A lot of oil pipelines cross at Cushing and the area has huge oil storage facilities. I live near Tulsa and there are reports that oil storage tank construction at Cushing is booming. So there may be something to what the oil expert says.

Posted May 14, 2008 12:33 PM

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