[Marxism] how are (oil) prices set?
marvgandall at videotron.ca
Tue Jul 8 16:35:14 MDT 2008
The current edition of the Economist doesn't believe the tripling of the oil
price in the past four years is tied to the tripling in oil futures activity
on the NYMEX, boosted by the rush into index funds by pension, endowment and
hedge funds. The Economist speaks for large institutional investors, but its
arguments still need to be addressed by those who believe it is speculation
rather than demand which is driving the oil price.
The magazine notes that the oil futures market is is a small part of global
oil market. Barclays, for example, calculates that the new indexers blamed
for juicing the price account for only 12% of the outstanding contracts on
NYMEX with a value equal to just 2% of the world's yearly oil consumption.
More to the point, speculators very rarely buy any physical oil. In essence,
they make bets on the direction of the oil price by buying futures and
options which they settle with a cash payment when they fall due. Payment is
in cash, rather than barrels of crude. Since no oil is ever held back from
the market the bets do not affect the price of oil "any more than bets on a
football match affect the result", it says.
It cites nickel and other commodities to show the disconnect between
speculation and the price of the underlying commodity. Nickel futures prices
have risen steadily during the past year yet the price of nickel has fallen
by half. On the other hand, the price of iron ore and rice, which are only
thinly-traded or not at all on futures exchanges, have risen almost as fast
as that of oil.
The Economist editors accept that speculators play an important role in
setting oil prices, but that the contracts mirror rather than distort the
actual trend in the oil market. If it were otherwise and futures prices were
too high in relation to supply, then demand for the contracts would fall,
leaving unsold pools of oil. But there's no evidence, they say, of rising
stocks caused by hoarding by speculators or producers - the latter of whom,
except for the Saudis, are pumping flat out. (That the Saudis are the swing
producer doesn't affect their analysis.)
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