Friday, August 22, 2008


Jim Hamilton has a good post on speculation and oil prices. It is tempting for politicians to blame high oil prices on speculators. They never seem to blame falling prices on speculators.

It is important to remember that the contracts that are being traded are for future oil deliveries. So it is important to think about how this could effect the current price. Think about tickets for a baseball game. If there is high demand for a future game does that cause the price of tonight's game to rise? That could happen if the owner reduced sales of tickets for tonight's game, but why would that happen? You cannot save unused seats!

With oil, of course, you can save it for future use. And that would raise the spot price. But then we would see inventories of oil increase. And as every economist has argued, we have not observed this as oil prices have risen. That is why it is hard to see how oil prices are being driven higher by speculation.

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