icandoitdon

The Reverse Wealth Effect

johngonole...

"Spend your money or we'll spend it for you."

very perceptive comment and absolutely true. the bastards punish savers and reward debtors. it's been that way for 40 years and it's getting worse.

The Reverse Wealth Effect

chris:

"If speculation was pushing prices significantly higher than what the fundamental market demands, wouldn’t stockpiles of oil be building up?"

you conclude that speculation cannot be causing the increase in oil prices, because oil inventories would build if speculation pushed the price of oil beyond the natural equilibrium price. this might be true in the long run but it is not true in the short run. oil has a very inelastic demand curve, i.e. short term demand is not price-sensitive

gasoline is a good example we can all relate to. it is only after doubling of price in the last couple of years that consumers are starting respond to the price by cutting back on consumption. cigarettes are another example. demand for cigarettes is notoriously insensitive to price and for decades has been the classic example of an inelastic demand curve taught in economics classes in universities through the world.

in two years if the price of oil remains at current levels i will throw in the towel and agree that speculation has not influced the price of oil. but it's far too early to draw that conclusion...i believe that financial speculation is a significant driver of the doubling we've seen over the last year.

"there are speculative forces in every asset market."

this is true, with a big BUT

BUT nothing comparable to today's market.

speculative activity is every market far greater today than in the past,made easier by futures exchanges that didn't exist 30 years ago, and by the emergence of trading entities that either didn't exist or didn't stray from their traditional domains of stocks and bonds. today hedge funds, mutual funds, soverign funds, pension funds and my grandmother can trade virtually any kind of futures for which a market exists. the cost of trading, in terms of exchange costs, margin and opportunity costs (i.e. cost of short term money) are lower than they've ever been. trading volume has exploded...and speculators far outnumber those who trade these futures for the purpose of hedging their production or consumption activities.

there is good reason to speculate in oil today. we have a wreck of a financial system, a declining currency, a runaway national debt, wars we can't win....and people are afraid of a crash. seems like an intelligent bet for turbulent times, but for those who haven't laid the bet long before now they're a little late to the party...

i would bet my mother in law that speculation accounts for at least 1/3 of the cost of a barrel of oil today. matter of fact you can have her even if i lose the bet.