Awhile ago when gas prices were going over $4 (US) a gallon, it was reported that the oil speculators were buying up oil, pushing it over $100 a barrell.
Considering that gas prices are below $2 a gallon now, and oil prices are under $50 a barrell, tell me if I am right:
Oil keeps rising; speculators think that because of limited supplies of oil, and constant demand from the 1st world and the developing world (China, India), that the prices will go up even more in the future, maybe to $125 a barrell. So they buy up options and futures in oil, ‘betting’ that it will go up. This drives the price up even more.
BUT Now that the economy is withdrawing, and oil prices have collapsed by more than half, the speculators lost their money because their purchases aren’t worth half of what they paid for them, and if they bought options/futures, it probably wont be valuable for them to cash in because they didn’t expect the price to drop.
If you buy high and sell low, you lose money, but I don’t need to tell you that. Warren Buffet called derivatives “weapons of financial mass destruction” and given that I heard that 80% of investors in commodities lose money and that fooling around with derivatives crushed Barings, not to mention the current crisis, Mr. Buffet isn’t kidding. I hear Hillary Clinton did ok in cattle futures though…
Well in part I ask because you would think the press would take advantage of this as a lesson in ‘greed’, but nobody seems to mention the fact that the people who helped drive up gas to over $4 a gallon (almost $5) have got hoisted on their own petard. So I wondered if in fact that is what happened.
I don’t know if this is the same question, but it sounds like you are asking if the current collapse in the price of oil refutes the idea that this summer’s price spike was driven by fundamentals and not mostly by speculation. Is that fair to say? If it isn’t the same question, and sorry for the hijack, is it true?
A thread from when oil prices were high. I stand by everything I said then.
There was speculation, but no bubble and no manipulation. Demand was high and (wrongly) expected to remain so. Now it’s low. And yes, those who bet the price would remain high have lost.
Hypothetically … if it had been a bubble, what would be different about how it’s all played out over the last few months? How would a bursting bubble be any different than what we’re seeing in crude oil/refined gasoline prices now?
That just shows that the supply curve for oil is inelastic, i.e., that it is hard to produce more oil when demand is high, so that prices go up a lot compared to a small increase in demand. It’s particularly hard in the short term to increase the supply of oil, because you need to drill more wells, build more pipe lines, build more refineries, etc., and that all takes time.
Which is why the “dirty hippie” approach of reducing consumption works a lot better than the “oil baron” approach of trying to drill our way out of the problem.
Like I’ve said before in gas threads, prices that skyrocket due to market forces will also plummet due to market forces.
OPEC raised its quotas overall between March '07 and August '08, but they remained well below each country’s capacity. Most of the Gulf states were already producing more than their quota share anyway due to US pressure, but OPEC states almost never produce at full capacity. It’s great in the short term but economic suicide in the long term.
Consumption was down 8.6% in the last week of September compared to the previous year. I can’t find a more recent number, but I suspect consumption will be back to last year’s level by now given the huge drop in prices.
I’d doubt that, since consumption declines now are driven by reduction of use in the production and shipping of products. I suspect there is some reduction also since unemployed people don’t commute. Airlines continue to cut back on flights which probably has some impact. Also, clearly a lot fewer people buying new cars bought gas guzzlers than was the case a few years ago, but I don’t know if this would be enough to reduce demand very much.