Wednesday, March 09, 2011

Speculating About Oil

As usual when the price of oil rises, there are some people out there who would like to blame "speculators". In response, let me note two things. First, speculation can only drive up the price of a commodity or asset through the hoarding or storage of that asset. Second, I haven't seen any evidence yet that there has been hoarding or storage of oil.

The blue line in the following picture shows the amount of oil being stored, with the exception of the US strategic petroleum reserve, expressed in terms of the number of months of US consumption it would satisfy. The red line shows the price of oil.

Just as during the last spike in prices in 2008, there is no evidence that people have been, on net, hoarding (and thus speculating in) oil. Yes, it is certainly true that some people have been speculating that oil prices will rise, and they have been buying futures contracts or actual physical oil in storage. But there have apparently been an equal number of people willing to part with their stored oil, as evidenced by the lack in any net increase in oil stocks.

When it comes to oil, it seems, plain old supply and demand considerations are enough to explain the fluctuations in oil prices without invoking the specter of speculators.

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