by e-kunomista
It’s really fundamentally a supply and demand thing, with the former not rising as fast as the latter. The major sources of demand growth in the past few years have been China and India. The fast pace of growth in China and the even higher growth in energy consumption has in fact made it the world’s largest emitter of greenhouse gases this year, overtaking the United States.
(We are a bit intrigued by the allusion of the respected economist Ciel Habito to possible price manipulation in the local petroleum market in his latest column in the Philippine Daily Inquirer. It was under his watch in the NEDA that the downstream oil industry was deregulated. Perhaps this is politically motivated).
But oil analysts agree that a big part of demand is speculative, coming from hedge funds trying to find shelter from the falling US$ by buying into commodity futures, minerals, agricultural staple, and oil. In the old days, speculation could be limited by physical storage capacity, but these days what’s influencing prices are futures contracts lodged in code in cyberspace. No need for Mr. and Mrs. Shady to hide oil barrels under the bed.
In normal markets, speculators play a positive role in stabilizing prices because they buy when prices are low and sell when high, thus narrowing the range and reducing volatility. Otherwise they’d lose their underpants if they do the reverse, right? But when a few hedge funds collude, they might be able to keep prices high with their self-fulfilling prophesy. But what feeds speculation are mainly geopolitical and weather-related events. Some researchers say that without the speculative element, prices should be within the $50-60/barrel range. (An earlier body of work of the Nobel economist Joseph Stiglitz focused on price stabilization and speculation).
The silver lining is that persistently high prices of oil and coal fuels development of cleaner alternatives. But what if oil and coal prices are artificially high because of speculation? What will happen to the alternative energy developers who based their feasibility studies on wrong relative price projections?
Granting that a few players have cornered the futures market, they still take large risks, especially if a spate of good Read the rest of this entry »