Thursday, July 31, 2008

Oil and Speculation from the CFTC

The Interagency Task Force on Commodity Markets has released its Interim Report on Crude Oil. This publication addresses the role of "speculators" in the oil futures market. I am still wading through the report but I found an apparent contradiction between two points that the task force made.

On page 18, the report said:

"The current short-run demand for oil is relatively price inelastic, meaning the quantity demanded does not change much relative to price changes (it takes a very large price increase to reduce the quantity demanded significantly). In the short run, the supply of oil is inelastic as well: the quantity supplied is not responsive to changes in market price, due to low spare capacity, the inability to bring new supplies online quickly, and relatively low inventories to draw down."

On page 28, the report said:

"Crude oil inventories can also shed light on whether the price run-up depicted in Figure 13 reflects mostly fundamental supply and demand factors. Artificially high prices will create an imbalance between supply and demand that should lead to inventory accumulation. However, as shown in Figure 14, inventories of crude oil and petroleum products in the United States and in OECD countries have generally declined over the past year. Based on these inventory figures, current prices, although high, are not prompting the inventory accumulation that would be associated with artificially high prices."

Well you can't have it both ways. On page 18, they correctly stated that both oil supply and demand is inelastic in the short term. On page 28, they said that if prices were "artificially high" meaning propped up by speculators, then demand would fall or supply would increase, leading to an inventory accumulation.

Are they making a distinction between the impact of "artificially high" prices and just "high" prices? Or is the distinction between long and short term impacts? If it is the latter, then I don't think that they have given enough time for this inventory accumulation to appear.

1 comment:

Dividends4Life said...

It makes sense that the short-run demand for oil is relatively price inelastic. I would say 95% of my use is "must" such as going to work, etc. For that portion, I will pay whatever it takes.

Great read!