Commodities tumble across the board, oil below 120.

[Sikon]

There can be such a reaction to a degree.

However, prices are still far higher than they were in the 1990s, and the first few years of this decade, so there remains more direct incentive for getting away from crude than there used to be.

They were below $40/barrel throughout that period then even converted to today's dollars, up until 2003, and now they are triple that.

The extreme rate at which oil was going up and up to the $140s / barrel and potentially beyond was headed towards hurting the economy more and more. One will see whether or not oil prices now stabilize eventually.

[Master of Ossus]

Entirely? Just that as a sole factor?
[snip]

Let's see:

By the standards of the small changes in supply and demand that have occurred over the past few months, supply goes up a lot between September and October of 2007, but, instead of decrease in price, oil price goes up greatly from about $75 to $90/barrel over that timeframe. And so on...

Conceded, but accounting for risk and predictions of supply and demand fluctuations, the supply-demand predictor is a far more powerful explanatory tool than "speculation," which you still haven't defined.

Compared to actual historical data, your kind of modeling assumptions don't work very well here:

You talk about a "massive fucking decrease" in the price of oil between the first and second quarters of 2008 when instead prices vastly *increased* over that timeframe from $80 to $140/barrel.

How are you measuring the demand change over this period? If it's purely quantity demanded, then that's a dumb measurement because quantity demanded is directly related to the price. That seems to be the IEA's measurement that you presented, but that ignores supply issues and risk and information changes over that time period.

If oil had near-infinite inelasticity instead of the actual figure, if supply was instead constant, and if there were no other factors ... then, in a simplified ideal theoretical market, there would have been a massive overall decrease in the price of oil between the first and second quarters of this year due to world demand going from 1.00 to 0.995 units.

Except that the change of quantity demanded was caused by the price increase--demand itself probably increased over that period, if only slightly.

[snip]

Again, you are mistaking quantity supplied and demanded for actual changes in supply and demand. This is erroneous because price has a direct impact on both.

Of course such changes in supply and demand have an effect on price, but there's more going on than your assumptions alone consider.[/b]

Oil is a relatively inelastic good. However, the recent enormous changes in oil price over the past few months are literally three orders of magnitude greater than the supply/demand changes.

Which suggests that they're caused by factors like risk assessment and information about the future.

Even more importantly, their rise up and down does not track well enough with those changes for the latter to be the sole factor.

We're talking about futures prices, which are set by the consensus estimate of what supply and demand are going to be at some point in the near future, with allowances for risk and returns. When you have various world events going on with the potential to influence supply and demand, even relatively slightly, then investors have to account for those when forecasting the prices of futures contracts.

A single order of magnitude difference would be one thing, but three orders of magnitude is something else. What if it had been a factor of a million difference instead of just a few hundred to 1000+ times? At some point, it should lead to a suspicion there is more going on than the market directly tracking supply/demand changes alone.

Where are you getting your figures from? Moreover, you cannot equate quantity supplied and quantity demanded with supply and demand.

Do you realize what enormous consequences there would be for the world if the price elasticity really was so astronomically low as just ~ 0.004? For example, a small portion of just U.S. Department of Energy funding could be applied in a manner drastically changing oil prices for the whole world.

Then adding 0.002 as much as current production or paying for that much reduction in usage would cause ~ 50% change in world prices, saving the U.S. hundreds of billions of dollars a year and giving payback quite literally orders of magnitude more than the expense of doing that.

However, confidence in you looking properly at real-world data is not inspired by how your stated figure for elasticity of demand differs by one to two orders of magnitude from what other sources than a webboard post suggest.

What is the price elasticity of demand for oil, then? Moreover, make sure that this is an immediate rate like the one I was referring to, instead of a time-lapsed rate over which people have vastly more control.

[snip]But your 0.004 figure differs by a factor of 65 from that, a difference of about *two orders of magnitude.*

I have actually read the full study on which that was based, as well as several other studies on the issue, and the analysis you presented of the data is flawed and not applicable to the example that I presented:

1. That study defines "short run" as being a one-year time frame, whereas the studies that I based this off of were looking at a weekly change. This is a critical difference because the study relies heavily on factors like the efficiency of cars improving--clearly a change that does not happen because of a weekly change in the price of gasoline.
2. The study you are basing that off of only applies to the US, which is actually an unusually responsive large consumer because the price of oil makes up an unusually large fraction of the total cost of oil products, here.

An article back from May 30th of this year:

[snip Goerge Soros being a retard]In an interview with The Daily Telegraph, Soros seems to think that speculation is a much bigger part of the price run up than most other experts. If speculative buying is indeed playing a bigger part than supply/demand curves, then at some point the price will inevitably come down. And if this scenario does play out the price will come down hard.

From here

Was that billionaire investor right back in May?



... a 20% price increase in a matter of several weeks followed by a sudden drop of almost 20% over 2 weeks.

1. The change in oil prices that you have presented corresponds precisely with the summer driving season, during which people have historically driven their vehicles more, used more gasoline, and hence increased the price of oil.
2. Soros is obviously not talking about a price increase that will happen in the next few weeks, but a present condition that already exists.
3. A bubble is not traditionally defined by a 20% fluctuation up and then down in the price of a commodity or stock. Indeed, the very fact that price was expected to "come down hard," which was actually represented by a 20% drop over a period of several weeks that coincided with the release of newer data.

I also quibble with the idea that "Soros has made billions in his career by being able to judge where markets are going to go and then react accordingly." Soros has made his money by deliberately manipulating currency markets. He's hardly "reacting" to an exogenous change that he predicted, but rather creates the changes themselves.

I also notice that you completely ignored my rather detailed explanation for why markets do not set prices in anything like the manner that you describe--namely that prices are set by the marginal trader.

[The Yosemite Bear]

Poor J & Aerius now they are stuck with the rest of us proles....

[Master of Ossus]

[snip]

``Crude is leading everything down,'' said Hector Galvan, a senior market strategist for RJO Futures in Chicago. ``People have that fear of not wanting to be the last one on the boat -- it's `abandon ship' for the short-term.''

That sounds like a significant amount of trend-following to me.

Again, you are totally ignoring the fact that prices are set by the marginal trader, and the detailed theoretical mechanism that I presented.

Moreover, when actual quantitative studies have been done on the market, they have uniformly determined that oil speculation (which you still have not defined) is [url=http://bbs.stardestroyer.net/viewtopic.php?t=124885]not relevant to the price of oil[/quote], or plays only a very miniscule role in setting prices.

[Surlethe]

In other words, (as we knew) the volatility is the result of speculation, which is obscuring whatever market fundamentals are at work. I'm starting to more and more favor banning speculation outright, and regulating that only those who use commodities may purchase futures contracts. That, it seems, would eliminate the speculation-induced volatility and still permit the futures markets to function as price stabilizers.

What, precisely, is your definition of "speculation," and how did it create volatility that obscured market fundamentals?

I'm going to retract my previous statement; it is inconsistent with my ascription of the rise to supply and demand issues, and I am not really educated enough to throw much weight behind it.

Nonetheless, I would propose that "speculation" is, roughly, playing the market to make a profit instead of participating in the market. It seems to have a lot to do with intentions - purchasing oil futures with no intention of taking possession of oil, e.g. As I understand, at a basic level a futures market works to stabilize prices by equating expected demand for the good with current demand for the contract. Introducing extra "speculatory" demand for contracts will drive up prices beyond that set by the existing expectation of supply and demand.

Basically, if prices for the contracts are increasing and a lot of people hop on for the ride up without actually demanding the good itself, they will increase the price of the contract further. Same if they jump off as the price is going down.

[Master of Ossus]

Nonetheless, I would propose that "speculation" is, roughly, playing the market to make a profit instead of participating in the market. It seems to have a lot to do with intentions - purchasing oil futures with no intention of taking possession of oil, e.g. As I understand, at a basic level a futures market works to stabilize prices by equating expected demand for the good with current demand for the contract. Introducing extra "speculatory" demand for contracts will drive up prices beyond that set by the existing expectation of supply and demand.

The problem with that is that very, very few people who trade futures contracts actually intend to take possession of the goods at any point. They usually settle their outstanding contracts at some period of time before delivery, but they still contribute to the market by distributing risk.

Basically, if prices for the contracts are increasing and a lot of people hop on for the ride up without actually demanding the good itself, they will increase the price of the contract further. Same if they jump off as the price is going down.

I understand, now, what you're talking about, but I don't really think you can have a futures exchange without people who are trying to do that. Indeed, I think that the futures market actually benefits from people who practice these behaviors, since they are allowing risk to be redistributed in a more efficient manner.

[Surlethe]

Basically, if prices for the contracts are increasing and a lot of people hop on for the ride up without actually demanding the good itself, they will increase the price of the contract further. Same if they jump off as the price is going down.

I understand, now, what you're talking about, but I don't really think you can have a futures exchange without people who are trying to do that. Indeed, I think that the futures market actually benefits from people who practice these behaviors, since they are allowing risk to be redistributed in a more efficient manner.

How does allowing speculators into the market more efficiently redistribute risk? And granting that it does, what about externalities? Take, for example, food price volatility caused by speculation in food markets.