# Oil prices: what if it is caused by speculation?
**URL:** https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609
**Category:** Great Debates
**Created:** [June 3, 2008, 11:06am UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609 "2008-06-03T11:06:41Z")
**Posts on this page:** 20
**Page:** 7
### Author:  [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)
#### Post date: [June 6, 2008, 9:04pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/121 "2008-06-06T21:04:16Z")
[QUOTE=xtisme]
while demand is rising especially in what they are calling OECD countries.
[/QUOTE]
Actually, it is non-OECD countries that are seeing the demand increases. Non-OECD meaning countries that are not members of the Organisation for Economic Co-operation and Development. There are 30 member countries. They are as follows.
AUSTRALIA
AUSTRIA
BELGIUM
CANADA
CZECH REPUBLIC
DENMARK
FINLAND
FRANCE
GERMANY
GREECE
HUNGARY
ICELAND
IRELAND
ITALY
JAPAN
KOREA
LUXEMBOURG
MEXICO
NETHERLANDS
NEW ZEALAND
NORWAY
POLAND
PORTUGAL
SLOVAK REPUBLIC
SPAIN
SWEDEN
SWITZERLAND
TURKEY
UNITED KINGDOM
UNITED STATES
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### Author:  [@XT](https://boards.straightdope.com/u/XT)
#### Post date: [June 6, 2008, 9:06pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/122 "2008-06-06T21:06:09Z")
Yes…sorry, that was a typo. My apologies. It’s actually in the part I quoted after all. 🙂
-XT
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### Author:  [@XT](https://boards.straightdope.com/u/XT)
#### Post date: [June 6, 2008, 9:14pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/123 "2008-06-06T21:14:48Z")
[QUOTE=Quartz]
It’s been an interesting discussion, but I’m really getting the message that while some of it is due to speculation, no one really knows the extent.
[/QUOTE]
I’d say the main issue is that ‘speculation’ is a vague term covering a hell of a lot of things. It depends on how you look at it to be honest.
Certainly the surge today is almost completely driven by speculation and uncertainty (and I think a bit of panic in the markets). People are unsure of how things will pan out and are trying to use their crystal balls to figure out what the future is going to hold. Will there be war in the ME? What about problems in North Africa? How about production problems in Nigeria and the North Sea? What will the US dollar do (I think I read that the EU or several countries in the EU are talking about increasing interest rates…which will drop the dollar more)? How will this all effect the US economy? Inflation? Higher unemployment? How will these things factor in?
Now…project that 6 months from now. And try and guess what it will all do to prices? Then factor in all the other variables you can think of (say, like IS this a bubble, and if so, will it break? Will production be ramped up…CAN it be? Stuff like that)…and bet a large chunk of your capital on your ability to gaze into the future.
It’s really very complex, though some folks love to try and boil it down to look for scapegoats and bad guys.
-XT
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### Author:  [@Voyager](https://boards.straightdope.com/u/Voyager)
#### Post date: [June 6, 2008, 9:22pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/124 "2008-06-06T21:22:12Z")
Here is a quote from the AP story today on the surge in prices:
> [@AP](#):
>
> Crude oil has seen a huge rebound this week after falling amid a drop in demand for gasoline. The jump continued Friday; light, sweet crude set a high of $139.12 in after-hours trading on the New York Mercantile Exchange after settling at $138.54, a gain of $10.75 in the regular session. The surge followed a Morgan Stanley analyst’s prediction that crude would reach $150 a barrel by July 4; a decline in the dollar and fresh tensions in the Middle East added to crude’s advance.
Prices going up because some analyst said they were going to go up is pure bubble behavior - how many stock price increases during the bubble were due to an analyst setting a higher target prices - incorrectly, often. The unemployment figures released today would certainly argue for a decrease in demand, which should depress prices at least a little.
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### Author:  [@XT](https://boards.straightdope.com/u/XT)
#### Post date: [June 6, 2008, 9:30pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/125 "2008-06-06T21:30:28Z")
Except that oil is traded not country by country but on a world market…so, unemployment may mean (perhaps) lower demand in the US…but wouldn’t change the demand in other countries, so wouldn’t have a direct impact on the price of oil on the world market (at least not that way…it might make the US dollar sink further however, which would actually drive the price up more).
I agree that speculation is driving the price somewhat…the problem is, things ARE uncertain right now so to a degree the prices are what they should be (though I also agree that to a degree we may be seeing a panic reaction that is driving things up further than they maybe should be, causing a bubble in the market).
-XT
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 6, 2008, 10:13pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/126 "2008-06-06T22:13:36Z")
A lot of people are summarily dismissing the idea of a bubble that may burst in the near future. Why is that?
EDIT: Is it because demand moves little in response to prices?
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### Author:  [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)
#### Post date: [June 6, 2008, 10:21pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/127 "2008-06-06T22:21:59Z")
[QUOTE=bordelond]
A lot of people are summarily dismissing the idea of a bubble that may burst in the near future. Why is that?
EDIT: Is it because demand moves little in response to prices?
[/QUOTE]
Lehman seems to be the main, reputable proponent of the thought that this is a bubble that may burst. My summary of the Lehman opinion would be the following.
Financial investors driven by disappointing returns in other markets are chasing the past, strong performance of the oil market by shifting investments into oil futures contracts. This is a classic ingredient for an asset bubble where price increases cause price forecasts to increase which drive new investor inflows that push prices even higher, etc. If the bubble bursts, prices will decline, but predicting the floor price and duration of the down-cycle is uncertain. Lehman expects the supply-demand balance to change in conjunction with a strengthening dollar in the coming months which will cause prices to fall sometime next year.
They have gotten quite a bit of press in the past couple of weeks, and I don’t necessarily think that people are just dismissing the idea. But by their own predictions, the bubble probably wouldn’t burst until next year anyways. It is going to take something (like a strengthening of the dollar) for people to move funds out of commodities.
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 6, 2008, 10:29pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/128 "2008-06-06T22:29:03Z")
[QUOTE=LonghornDave]
It is going to take something (like a strengthening of the dollar) for people to move funds out of commodities.
[/QUOTE]
Hypothetically, how might the dollar strengthen? Does the near-term funding of the war in Iraq mean that the dollar can’t make a comeback any time soon?
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### Author:  [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)
#### Post date: [June 6, 2008, 10:42pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/129 "2008-06-06T22:42:32Z")
[QUOTE=bordelond]
Hypothetically, how might the dollar strengthen? Does the near-term funding of the war in Iraq mean that the dollar can’t make a comeback any time soon?
[/QUOTE]
Well, either the supply needs to be reduced or the demand needs to be increased. The dollar will strengthen if the Fed raises interest rates. There needs to be a concentrated effort by the Fed to strengthening the dollar even if it means a recession occurs (I realize that the debate is out about whether we are currently in a recession or not).
I don’t really see much of a connection between the war in Iraq and the weakness of the dollar. I’m sure there might be some effects, but I don’t really think it would be a primary contributor.
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### Author:  [@gonzomax](https://boards.straightdope.com/u/gonzomax)
#### Post date: [June 7, 2008, 2:18am UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/130 "2008-06-07T02:18:03Z")
[QUOTE=LonghornDave]
The primary drivers for the last two day increases appear to have been further weakness in the dollar and rumors of an attack of Iran. Certainly that would affect supply a great deal considering that Iran is the 4th largest producer (I believe). Further, Morgan Stanley made a prediction of higher prices in the future due to strong demand in Asia.
[/QUOTE]
Good definition of speculation. Poor example of supply and demand.
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 7, 2008, 2:17pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/131 "2008-06-07T14:17:16Z")
[QUOTE=LonghornDave]
I don’t really see much of a connection between the war in Iraq and the weakness of the dollar. I’m sure there might be some effects, but I don’t really think it would be a primary contributor.
[/QUOTE]
I was thinking (without looking it up) that the U.S. has gone into deficit spending to fund the war in Iraq. With a greater debt load, the U.S. dollar would be worth less, no?
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### Author:  [@ultrafilter](https://boards.straightdope.com/u/ultrafilter)
#### Post date: [June 7, 2008, 4:19pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/132 "2008-06-07T16:19:36Z")
[QUOTE=bordelond]
I was thinking (without looking it up) that the U.S. has gone into deficit spending to fund the war in Iraq. With a greater debt load, the U.S. dollar would be worth less, no?
[/QUOTE]
No. Japan has a much greater debt load than the US (as measured by public debt as a percentage of GDP), and the dollar is still falling against the yen.
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### Author:  [@gonzomax](https://boards.straightdope.com/u/gonzomax)
#### Post date: [June 7, 2008, 5:38pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/133 "2008-06-07T17:38:08Z")
[Arab News | Worldwide News, Latest Breaking News & Updates](http://www.arabnews.com/?page=7§ion=0&article=107732&d=11&m=3&y=2008) It is dealers and speculators according to this arab newspaper. Supply is high ,demand is dropping.
This bubble too will burst with taxpayers having to save them again.
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 7, 2008, 5:44pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/134 "2008-06-07T17:44:39Z")
[QUOTE=ultrafilter]
No. Japan has a much greater debt load than the US (as measured by public debt as a percentage of GDP), and the dollar is still falling against the yen.
[/QUOTE]
😕
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 7, 2008, 5:50pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/135 "2008-06-07T17:50:27Z")
[QUOTE=gonzomax]
[Arab News | Worldwide News, Latest Breaking News & Updates](http://www.arabnews.com/?page=7§ion=0&article=107732&d=11&m=3&y=2008) It is dealers and speculators according to this arab newspaper. Supply is high ,demand is dropping.
This bubble too will burst with taxpayers having to save them again.
[/QUOTE]
Interesting read, but it’s an editorial from March. You can’t really use it as a source.
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### Author:  [@bordelond](https://boards.straightdope.com/u/bordelond)
#### Post date: [June 7, 2008, 6:27pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/136 "2008-06-07T18:27:17Z")
From this [Yahoo article](http://news.yahoo.com/s/ap/20080607/ap_on_bi_ge/oil_prices_bodman):
> [@](#):
>
> **While demand has increased as supply has stalled** , analysts have also cited the decline of the U.S. dollar, fears about the long-term supply of oil, and aggressive speculation as factors in rising prices.
:shrug:
Don’t know what to think. Again, there is the time-frame issue, one supposes. But it’s odd that I can find cites in both directions.
> [@](#):
>
> Lack of transparency in the oil market has also been cited as a possible cause of higher prices. Bodman said that while the United States and host Japan have been “diligent” in disclosing production and consumption data, some other countries need to do more.
>
> Proponents of such transparency, including the IEA, say greater disclosure of accurate statistics helps markets set prices that more precisely reflect supply and demand. Underreporting of production, for instance, can drive prices higher as traders think supply is lower than it actually is.
Now this raised my eyebrows. I can’t help thinking that the rise in gasoline prices has been more or less artificially spurred (as opposed to true and open market forces working “organically” across the globe) … and this kind of makes me think that I could be correct.
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### Author:  [@ultrafilter](https://boards.straightdope.com/u/ultrafilter)
#### Post date: [June 7, 2008, 6:32pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/137 "2008-06-07T18:32:02Z")
[QUOTE=bordelond]
😕
[/QUOTE]
The point is that if the national debt were a significant factor in causing a country’s currency to decline, Japan’s should be falling much faster than ours, as they have a much higher level of debt relative to their economy. That’s not happening, so there’s something else going on.
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### Author:  [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)
#### Post date: [June 7, 2008, 6:54pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/138 "2008-06-07T18:54:49Z")
[QUOTE=bordelond]
I was thinking (without looking it up) that the U.S. has gone into deficit spending to fund the war in Iraq. With a greater debt load, the U.S. dollar would be worth less, no?
[/QUOTE]
My inclination is to say that the increased national debt caused by the war spending has not been a primary driver in the decline in the dollar’s value. I will admit, though, that I am far from an expert on currency. I know my limitations, and this is definitely a topic that I should let someone else speak on.
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### Author:  [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)
#### Post date: [June 7, 2008, 7:50pm UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/139 "2008-06-07T19:50:05Z")
[QUOTE=gonzomax]
Good definition of speculation. Poor example of supply and demand.
[/QUOTE]
So predictions based on the current available facts that demand will continue to grow in Asia and that a supply disruption may take place is now speculation? Is it your view that anything based on a forecast is pure speculation? Let me ask you, when people talk about a problem with the social security system being the projections that future expenditures will out pace future revenues do you just consider that idiotic speculation because currently all retirees are getting their benefits?
However, your main problem seems to be your desire to find a singular reason for a complex, multi-faceted event. Most people here understand that price increases are a combination of many things: weakness of the dollar, increased production costs, difficulty in replacing reserves, continued global consumption increases, movement of funds into commodities, etc. We look at the past to study trends, analyze the current situation, try to predict the future. We try to weigh the various factors to see how much of the situation is caused by A versus B or C. We read differing viewpoints from experts in the field rather than searching for anyone that will say something even remotely supporting our view. We try to keep an open mind. We’re willing to be proven wrong, and we like to learn. It all makes for an interesting topic to discuss. Sorry that you are left out of that. You are like an alien from a one dimensional world that is having trouble coping with all the extra dimensions here on planet earth.
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### Author:  [@gonzomax](https://boards.straightdope.com/u/gonzomax)
#### Post date: [June 8, 2008, 1:29am UTC](https://boards.straightdope.com/t/oil-prices-what-if-it-is-caused-by-speculation/451609/140 "2008-06-08T01:29:59Z")
Wrongo. The problem with Israel saying they saw no choice but to attack Iran had much to do with the price jump of yesterday. That made speculators think a disruption in oil supply was impending. Note, nothing happened to the supply. The speculators just think it may and they gambled on it. That cause and effect is clear. I made it clear that approx. 60 percent is speculation. That is a lot. If you want to find multiple reasons for the other 40 have at it.
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