price shock represents a huge shift in relative prices and
a cross-border redistribution of wealth (from countries that are not oil consumers to net oil exporters), what difference
does it actually make to the world economy and its prospects for growth? Third, is it realistic to expect a repetition of
the strong response, both in supply and demand, that occurred in the 1980s, driving oil prices further back down. Or is there
now something fundamentally different about the oil world, as ‘peak oil’ theorists claim, which makes it inevitable that from
now on oil prices will remain high when a recovering world economy encounters falling world production.
As prices soared towards $140 per barrel, scapegoats had to be found. The idea emerged that responsibility did not lie primarily
with consumers for consuming ‘too much’ relative to supply, or with producers for producing ‘too little’ relative to demand
(though consumers are blamed in oil-producing countries and producers in oil-consuming countries). Rather, the fault lay with
‘speculators’. Oil consumers and producers have agreed on the pernicious role of speculators, if little else. There were,
at one time, a dozen bills in the US Congress designed to deal with these malign forces of darkness. European leaders have
been equally imaginative in coming up with wheezes to punish them: taxeson speculators, closing down markets in which they operate, unleashing criminal prosecutors against them.
There is a purist view – which I don’t hold – that says that competitive markets will always be efficient even if they are
volatile, since the price simply reflects the information available to market participants. I have noted in earlier chapters
– in relation to housing, for example – that it is possible to have highly inefficient markets if prices are largely based
on expectations of future price changes, especially in long-life assets. There is a separate argument, from the same ideological
stable and with the same practical consequences, that speculators are inherently stabilizing in their influence on markets
since they (collectively) only make a profit if they correctly anticipate the trends and turning points in the markets. In
other words, they sell appreciating assets before markets peak, pushing down the price when it is soaring, or buy before markets
hit rock bottom, pushing up the price. In practice, however, there are many examples of destabilizing speculation in the panics
and crashes experienced in financial and commodity markets.
Was the recent spike a product of such ‘destabilizing’ speculation? It is perfectly reasonable to argue that in certain circumstances
those who speculate in a commodity – in this case oil – can destabilize markets in an inefficient way. There was an example
during the oil shocks of the 1970s. Motorists queued in ‘gas lines’, as they were called in the USA, to keep their tanks topped
up, believing that scarcity would become worse and that prices would rise further. The consequential increase in stock levels
held in tanks increased demand, and pushed up the price even further. Much oil was also wasted by motorists queuing at the
pumps with their engines running. There were also reports of oil companies, industrial users, utilities and distributors hoarding
stocks, or buying beyond expected consumption, in anticipation of higher prices to come. It was estimated that, in 1979–80,
speculative accumulation of inventories by companies and consumers added 3 million barrels / day of demand above consumption,
alarger amount than the actual shortage of production that caused the crisis. When the inventories were sold off in the falling
market that followed, or motorists ran on lower tanks when prices fell, the ‘speculators’ lost money, but their losses did
not provoke a lament from those who had earlier denounced speculative greed.
What evidence is there that
a cross-border redistribution of wealth (from countries that are not oil consumers to net oil exporters), what difference
does it actually make to the world economy and its prospects for growth? Third, is it realistic to expect a repetition of
the strong response, both in supply and demand, that occurred in the 1980s, driving oil prices further back down. Or is there
now something fundamentally different about the oil world, as ‘peak oil’ theorists claim, which makes it inevitable that from
now on oil prices will remain high when a recovering world economy encounters falling world production.
As prices soared towards $140 per barrel, scapegoats had to be found. The idea emerged that responsibility did not lie primarily
with consumers for consuming ‘too much’ relative to supply, or with producers for producing ‘too little’ relative to demand
(though consumers are blamed in oil-producing countries and producers in oil-consuming countries). Rather, the fault lay with
‘speculators’. Oil consumers and producers have agreed on the pernicious role of speculators, if little else. There were,
at one time, a dozen bills in the US Congress designed to deal with these malign forces of darkness. European leaders have
been equally imaginative in coming up with wheezes to punish them: taxeson speculators, closing down markets in which they operate, unleashing criminal prosecutors against them.
There is a purist view – which I don’t hold – that says that competitive markets will always be efficient even if they are
volatile, since the price simply reflects the information available to market participants. I have noted in earlier chapters
– in relation to housing, for example – that it is possible to have highly inefficient markets if prices are largely based
on expectations of future price changes, especially in long-life assets. There is a separate argument, from the same ideological
stable and with the same practical consequences, that speculators are inherently stabilizing in their influence on markets
since they (collectively) only make a profit if they correctly anticipate the trends and turning points in the markets. In
other words, they sell appreciating assets before markets peak, pushing down the price when it is soaring, or buy before markets
hit rock bottom, pushing up the price. In practice, however, there are many examples of destabilizing speculation in the panics
and crashes experienced in financial and commodity markets.
Was the recent spike a product of such ‘destabilizing’ speculation? It is perfectly reasonable to argue that in certain circumstances
those who speculate in a commodity – in this case oil – can destabilize markets in an inefficient way. There was an example
during the oil shocks of the 1970s. Motorists queued in ‘gas lines’, as they were called in the USA, to keep their tanks topped
up, believing that scarcity would become worse and that prices would rise further. The consequential increase in stock levels
held in tanks increased demand, and pushed up the price even further. Much oil was also wasted by motorists queuing at the
pumps with their engines running. There were also reports of oil companies, industrial users, utilities and distributors hoarding
stocks, or buying beyond expected consumption, in anticipation of higher prices to come. It was estimated that, in 1979–80,
speculative accumulation of inventories by companies and consumers added 3 million barrels / day of demand above consumption,
alarger amount than the actual shortage of production that caused the crisis. When the inventories were sold off in the falling
market that followed, or motorists ran on lower tanks when prices fell, the ‘speculators’ lost money, but their losses did
not provoke a lament from those who had earlier denounced speculative greed.
What evidence is there that
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