Arnold Kling  

Oil Bubble Talk is Back

Thomas Sargent, Master Macroec... Lawrence Lindsey Vs. Christy R...

CNBC quotes Peter Beutel,

I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn't be anywhere near where it is

He sees high inventories of oil. Anyway, talk of speculators driving up the price of oil brings back memories.

The cost of carrying oil inventories is the cost of storage plus the real interest rate. The short term real interest rate is low, that lowers the cost of inventory, and that should lead to higher inventories. Beutel says that inventories are much higher than when he started in the business in 1980. But that was when the bond market vigilantes and Paul Volcker sent interest rates soaring, which raises the cost of inventory and should lead to lean inventories.

COMMENTS (4 to date)
OneEyedMan writes:

Hasn't the trend been towards lower inventories in the economy as a whole? Business people always seem to be talking about just in time inventory. It would be interesting to know if oil firms shed inventory over this period and non-producers, non-consumers increased their holdings.

I'm not sure how it fits in, but unlike food commodities which have to be produced, oil in the ground is also a form of inventory. Any oil firm with untapped reserves (not wells with oil still in the ground pumping full speed) is storing oil in the earth. If you want to store oil for later why buy it out of the ground? Wouldn't it be cheaper to store it in the ground? It cannot just be the liquidity of oil futures contracts because we are talking about physical oil being stored here.

Is it really plausible that speculators are causing the current prices? Since new oil is constantly flowing to market, they'd have to be accumulating ever larger holdings to prop up the market. 50 million barrels seems like a lot of inventory, but that is just 2 days of global production.

JPIrving writes:

I love economics. Nothing is every as it seems.

There is also the potential profit of holding oil during a strong recovery. Couldn't the "hoarders" be pricing in the probability of a sudden boost in demand? That could happen under both the Sumner and Recalculation regimes.

Seems to me that the demand for oil at "full" employment can only have grown since summer 2008. If the OECD recovered that would drive up demand not only in those countries but also in their developing trading partners. Hell, oil could be $200 by 2012?

rjs writes:

if there were no investors using equities as an investment they wouldnt be as high as they are now, either...

what a crazy statememt...

The Unbeliever writes:

Well, who does he define as "investors", just speculators who are not significantly impacted by oil prices in their real world, non-investment activities?

Trucking and airline companies routinely hedge against rising fuel prices via oil investments. Are they investors, or merely smart commodity end users?

Companies who have shipping costs, but do not directly handle transportation (think a catalog company that sends products via UPS/FedEx) sometimes hedge rising shipping costs. Are they investors?

Heck, I have an acquaintance who drives many miles for his daily office commute, who set up an oil hedge to offset his monthly gasoline costs and make driving his car cheaper than taking public transport. Is he an investor needlessly driving up the price, or just a late game joiner rationally responding to other oil speculators' driving up the cost of his commute?

At some point financial instruments become so heavily embedded in business transactions that the line between user, investor, and speculator becomes very blurry. If you're going to carve out any one class, you need to not only define your terms, but to explain why that one class is causing market moves significantly different than the other classes.

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