Saturday, March 28, 2009
Is the oil market in "market failure"?
We've heard the market fundamentalist rhetoric about messing with the market. But what if the tiny percentage of slowing of oil demand -- the one that caused the 63% drop in per-barrel prices over the last few months -- were preventing investment in production for the resurgence in demand that is sure to come as the global recession eases?
The New York Times quotes the Saudi oil minister saying,
One might argue that such wild price swings are the result of speculation and leveraged derivatives. OK, so what if they were? Isn't that what a free market is all about?
Of course, nobody can predict the future. But I think serious students will consider the plausibility of such a scenario. and policy makers might want to have Plan B in their back pocket.
The New York Times quotes the Saudi oil minister saying,
“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion. If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”Indeed the Times reports
The global slowdown has forced oil companies to slash their investments, postpone or cancel expansion plans, or delay drilling in many corners of the world . . . about 7.6 million barrels a day of future supplies are “at risk” of being deferred or canceled, like heavy oil or deepwater projects, and which could bring total supplies to 101.4 million barrels a day by 2014. Last year, the group projected that capacity would rise to 109 million barrels a day by then.Hmmm, 101.4 million in supply, 109 in demand . . . What does market failure look like? Suppose the first signs of recovery in the global economy are short-circuited by a wicked oil price spike? Would this be the behavior of a smoothly functioning marketplace? More importantly, would this be desirable? Would it lead towards the kind of world most people want to live in or away from it?
One might argue that such wild price swings are the result of speculation and leveraged derivatives. OK, so what if they were? Isn't that what a free market is all about?
Of course, nobody can predict the future. But I think serious students will consider the plausibility of such a scenario. and policy makers might want to have Plan B in their back pocket.
Technorati Tags: Economics, Energy, HubbertsPeak, Markets, Oil, ScenarioPlanning
Comments:
How about this? Predicting the future is difficult. Markets do it less effectively for the medium-term than for the short-term, and not at all for the long-term (for some reasonable definitions of short, medium, and long). Price swings aren't a sign of market failure; they are inherent in market function.
The "smoothly functioning" canard sweeps uncertainty under the rug for the comfort of the simple-minded. One would hope that the last five years have at least been enough to teach us that volatility is itself volatile, and that any extended regime of trade within any particular range of a price trend only sows the seeds of future "catastrophic" volatility regimes.
The policy brigade will always have governance options at the ready, but they can no more assume away the market by fiat than they can assume away physics. As has been the case throughout history, any actor, private or public, has the power to dictate price only temporarily. The higher the dam, the more calamitous the inevitable triumph of the river for those downstream. If those who make these scientific predictions of the future of the oil market had any faith in their work, they would be investors.
Of course, investors are often wrong, but at least we never have to listen to their false certainties. The more immediate danger for the USA is that our governing elite has fooled itself that it can control prices indefinitely, at least in several politically-valuable markets. It's clear at this point that it will be many wasteful years before house prices return to their natural (much lower!) levels. Do we really want to add oil to the list of products the prices of which the American taxpayer struggles mightily and ultimately futilely to control?
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The "smoothly functioning" canard sweeps uncertainty under the rug for the comfort of the simple-minded. One would hope that the last five years have at least been enough to teach us that volatility is itself volatile, and that any extended regime of trade within any particular range of a price trend only sows the seeds of future "catastrophic" volatility regimes.
The policy brigade will always have governance options at the ready, but they can no more assume away the market by fiat than they can assume away physics. As has been the case throughout history, any actor, private or public, has the power to dictate price only temporarily. The higher the dam, the more calamitous the inevitable triumph of the river for those downstream. If those who make these scientific predictions of the future of the oil market had any faith in their work, they would be investors.
Of course, investors are often wrong, but at least we never have to listen to their false certainties. The more immediate danger for the USA is that our governing elite has fooled itself that it can control prices indefinitely, at least in several politically-valuable markets. It's clear at this point that it will be many wasteful years before house prices return to their natural (much lower!) levels. Do we really want to add oil to the list of products the prices of which the American taxpayer struggles mightily and ultimately futilely to control?
