Randy Miller

CFTC Belatedly Discovers the Speculative Oil Bubble

Somebody show me a valid price elasticity of demand calculation that would show me how a very small percentage reduction in crude demand could produce an 80 percent price drop, from $147 bbl to $32 per bbl.

This is all about bubbles, herd mentality, and who has better information. Everyone perceived that GS and Morgan Stanley had better information, so when they came out with price projections showing oil going higher and higher, the herd believed them, and stampeded to long contracts, creating the bubble.

So.... are the Nigerian rebels blowing up any pipelines this year? Are the Israelis planning any air strikes into Iran?

One of the factors driving up prices was the fear that the Israelis would strike Iran, Iran would close the straits of Hormuz, and we would lose 20 percent of the world's oil supply. A GS spokesman could obliquely refer to that to drive up the price, and one of Goldmans US government insiders would already know that the Bush administration had put the kibosh on any Israeli overflights over Iraq to Iran. Is GS really any smarter, or do they just have better contracts?

A free market only works correctly if all participants have access to the same information. The winners will do a better job of analyzing that information and make money. But, there is no free market without transparency in all markets, so why isn't Larry Summers effectively pushing transparency?