Current location:	Kristiansand
Current mood:	lunch
Entry tags:	economy

"Market gravity"
In Praise of Oil Speculation (BusinessWeek) explains fairly well why speculators are good for us, but I'll add a little to make it even easier to understand.


First let us acknowledge the "market gravity" that is the central point of the article. There is no doubt that speculators can push up the price of oil, but only temporarily. After that, the price will fall beyond what it was initially, so people will suddenly be delighting in cheaper fuel than they would otherwise had. In a market that is otherwise in balance, this is unavoidable. The higher prices can only be maintained as long as people keep pouring more and more money into the speculation bubble.

What Peter Coy does not deign to mention is that we have already seen this elsewhere. First in the dot.com bubble at the beginning of the decade, and then in the housing bubble that followed, and that is unwinding even as we watch. The prices kept rising as long as people kept pumping (mostly borrowed) money into the bubble. Already years ago, I warned that the prices would come back down (except in cities where population growth exceeded available land). I did not even need to use the wisdom of Solomon to figure that out, because the same thing had happened in Japan in the 1990es and here in Scandinavia (on a smaller scale) in the 1980es. But people still ignored the voice of reason, becase People Are Stupid.

So now, to the great surprise of everyman, the house prices tumble. And the speculators go into oil and grain and other commodities (roughly, raw materials). Some of these will follow the same bubbly path, probably. But others - among them oil - have an edge: The demand for them is increasing faster than population, which means they are doomed to become more expensive. Speculating in higher future prices is therefore quite safe, as it is almost impossible to not be right. But as more and more people realize this, there will probably be a bubble here too, although it will fall back to a higher level.

These things are so obvious that you almost need to be a politician or cleric to not see them. Mild retardation is probably not enough, since even a small child will realize that two people cannot get more apples by trading the apples between each other. (Not sure how small - but around first grade probably.)