July 23, 2008
Bryan Caplan
Justin Wolfers says that current price of oil is a better predictor of future oil prices than oil futures markets:
And it turns out that they all do worse than one simple forecast: the current oil price. That’s right: the most accurate forecast of oil prices over the next month, year, or quarter is the current oil price. We call this the no-change forecast.
As long as Wolfers is referring to the
nominal price, I'm on track to win
my bets with Cowen and Balan. If he's referring to the real price, I may be in trouble.
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CATEGORIES: Energy, Environment, Resources (238)
This is probably a naive question but shouldn't arbitrage mean that the future price is just the present price plus interest?
Otherwise, if the future price for 6 months from now was say 15% higher than the spot price, wouldn't you just borrow some money, buy some oil or other commodity on the spot market, sell the futures for 15% more and pocket the difference?
David,
That's how its taught, but not so simple in oil markets. The futures prices are nearly always lower than spot prices.
http://en.wikipedia.org/wiki/Backwardation
Under the above logic, there have been simple arbitrage trades in oil for the last 30 years.
It is the wrong bet. This cornucopian only believes that over the long run (5+ years) it will get more affordable to more humans to travel at a given level of comfort. That could mean cheaper gasoline or more efficient vehicles or other things. Petrol may have been getting less affordable in the west but more affordable to the Chinese.
