Romney has avoided any discussion of eliminating oil subsidies.
Most of the so called subsidies are standard tax breaks that all companies get. And even if you include them anyway, the special taxes on the oil industry are larger than the tax breaks, or even the oil companies profits. The net subsidy is negative. Oil is disadvantaged by government action and governments in the US make more from oil then the American oil companies do.
"It is excessive speculation, which is a fancy word for saying that gamblers wearing Wall Street suits have taken these markets over," he said.
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...Assume for sake of argument that speculative activity in a commodity derivatives market has distorted the price of the commodity; convergence implies that if nearby futures prices are indeed distorted, physical prices have to be distorted too. Millions–and in some cases billions–of individual consumers, and myriad producers, face these prices. If these producers and consumers are not playing the same learning game that is going on in the futures market, the price distortion will affect their production and consumption decisions. All else equal, if speculators cause the price to be too high, consumption will be depressed, and production will increased. This will lead to an accumulation of inventories. If the price distortion is large, the inventory accumulation is likely to be large.
Now, there are circumstances in which it may be difficult to detect empirically the inventory accumulation. If supply and demand are extremely–extremely–inelastic, large price moves may result in small inventory changes that are hard to detect in the noisy stock data that are available for some commodities. Moreover, all else may not be equal. As Singleton (perhaps cleverly) notes, my research shows that a decline in fundamental uncertainty could lead to a decline in inventory that masks the speculation-induced change. (Although more plausibly, higher fundamental volatility leads to greater speculation, which would lead to an increase in inventory that could be blamed on speculative price distortions.)
But there are historical episodes–like the Hunts in silver and government price-support programs–in which price distortions have been associated with huge accumulations of inventory. Those claiming speculative distortion need to provide a credible explanation whenever an alleged price bubble is not accompanied by a rise in inventories. It can happen, but it’s unlikely–so show me how.
So, for the Singleton story to work, it has to be the case that consumers and producers–or at least a big chunk of them–are playing the same learning game as the investors. I find this wildly implausible, particularly for consumers. Would consumers really buy more gasoline today–gasoline which they are going to consume, not store in anticipation of profiting from price appreciation–for speculative reasons because prices have been trending up? Really? (Perhaps you could argue that they would engage in intertemporal substitution, but this also stretches credulity.) It might be somewhat more plausible that suppliers would not produce more today in response to a speculative price bubble in anticipation that they can sell at a higher price in the future.
These stories–and they are just that–are not logically impossible, but they are just implausible, to me anyways. The consumer side is particularly implausible. To emphasize: most consumers of gasoline or copper or corn or whatever cannot store the commodity, and hence cannot earn a speculative profit. Thus, they should respond parametrically to prices, and respond to higher prices by reducing consumption. The decline in consumption in markets (like the US) where consumers are subject to price changes (because there are no price controls or subsidies) during the oil price spike of 2008 supports this view. So price distortions should lead to inventory accumulation.
This is an excellent illustration of why commodities are a good place to test theories of speculative distortion. The speculators may play their games in the financial markets, but if they affect prices, consumers and producers who don’t play the game alter their behavior. Looking for evidence of behavioral changes–consumption and production changes–is a great way to detect price distortions. That is not possible in asset markets. Consumers and producers are canaries in the coal mine.
Which all means that to persuade, Singleton, and those who are using his paper to say Eureka!, need to provide a plausible explanation of how learning/behavioral finance effects change the behavior of producers and consumers in ways that what would mean that price distortions do not lead to noticeable changes in quantities like inventory. That is, he points to models of asset markets in which there are no consumers; to make a realistic and testable model, you would need to include producers and consumers as well–not just demand for a stock of assets, but flow demand and supply.
One last thing. The Singleton paper has “boom and bust” in the title, and many behavioral finance/learning models predict boom and bust patterns in speculative prices. There was a boom and bust in oil prices and other commodity prices–but the bust in 2008 was not plausibly the kind of speculative bubble bursting that occurs in the models. It was definitely driven by a huge collapse in demand resulting from the financial crisis. Thus the “bust” part of the price movements should not be used as evidence in favor of the theory. Instead, it fits far better a fundamentals-based story. As I told many reporters as prices peaked in summer 2008, when they asked what would bring down prices: be careful what you ask for. A major recession would be the most likely cause of a big price decline. That’s what happened–not the bursting of a speculative bubble.
Relatedly. Prices that positively cannot be driven by asset pricing bubbles–because they are are definitively not assets–boom and bust. During the same period that oil prices were booming and then busting, shipping rates were doing the same thing. Space on a ship is not an asset. It is not storable; you use it or lose it. You can speculate on the price of the ship, but the price of the services of the ship cannot be subject to asset pricing bubbles–because these services are not an asset. The spike and thudding collapse of shipping rates in 2007-early 2009 is indicative of a rise and fall in the demand for commodities (which are transported by ship), and cannot be explained by speculative distortion induced by learning, etc. Put differently, booms and busts occur in markets in which asset price bubbles are impossible.
To summarize. 1. Singleton’s results are perfectly consistent with rational pricing, no speculative distortions, and financial market frictions. 2. The conditions that would reconcile the kind of learning/behavioral finance model that would be necessary to explain the lack of inventory accumulation are highly implausible. If somebody wants to tell a more convincing story about commodity price bubbles, it is necessary to do more than just genuflect to models devised to explain things like the dot-com bubble. You have to create a model that includes flow demand and supply, and derive testable implications of investor/speculator learning or irrationality for quantities produced, consumed, and stored. Only then will it even be remotely possible to determine the real implications of these learning models for commodities.
streetwiseprofessor.com
Price gougers and speculators are the new witches
I actually wrote the previous post mentioning the speciousness of gouging/predatory pricing accusations last night but never got around to publishing it. This morning I woke up to this story about Obama and Holder demagoguing high gas prices:
Chicago Sun-Times | Julie Pace | Obama aims to ‘root out’ cause of high gas prices
RENO, Nev. — President Obama said Thursday that the Justice Department will try to “root out” cases of fraud or manipulation in oil markets, even as Attorney General Eric Holder suggested a variety of legal reasons may be behind gasoline’s surge to $4 a gallon.
“We are going to make sure that no one is taking advantage of the American people for their own short-term gain,” Obama said at a town-hall style meeting at a renewable energy plant in Reno. [...]
Obama, decrying such levels as yet another hardship “at a time when things were already pretty tough,” said Holder was forming the Financial Fraud Enforcement Working Group. The task force will focus some of its investigation on “the role of traders and speculators” in the oil-price surge, Obama said. The group will include several Cabinet department officials, federal regulators and the National Association of Attorneys General.
In Washington, Holder said he would press ahead with the investigation, even though he did not cite any current evidence of intentional manipulation of oil and gas prices or fraud.
This makes as much sense as saying that since your children are running fevers you will be launching a preemptive, evidence-less investigation into the thermometer manufacturers to make sure they aren't manipulating temperatures for their own selfish, short-term gains.
And by the way, you also hold the power of life and death over the thermometer industry. But not big deal, it's just a fact-finding investigation. You're totally not trying to intimidate or scapegoat anyone.
Holder did generously admit the following though:
“Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government’s disposal,” Holder said in a memo accompanying a statement announcing the task force. “It is also clear that there are lawful reasons for increases in gas prices, given supply and demand.”
So he has apparently re-discovered some bits of the Arrow-Debreu model regarding commodities in different places needing to be treated independently, and also tacitly acknowledges that on occasion markets may behave the way they do even without sinister Robber Barons pulling all the strings. How gracious of him.
How much previous "work and research" did it take them to figure this out? Anyone who has taken a road trip could have told him that. Anyone who has ever had a conversation about gas prices could have told him that. Anyone who knows that refineries are not uniformly distributed across the country and that it takes effort to transport liquids could have told him that. Anyone who knows the country is chopped up into different regions in the regulations governing refining and distribution of petroleum products could have told him that.
Matt Welch sums this up well:
Here's your federal energy policy: Do nothing significant to increase domestic supply, create mandates to have XX% of future supply come from magical green leprechauns, then when prices (surprise!) go up, you know what to do: Blame the "speculators".
If you don't get why I find this so absurd and ignorant listen to this EconTalk about price gouging with Mike Munger, and read this very comprehensive Coyote Blog post about oil speculation.
Let's be clear about one other thing: "speculation" just means making a bet about what the price of something will be in the future. When you bought your house, or signed a multi-month lease, or waited to buy a car, or contributed some money to your 401k plan, or sold your extra tickets to a football game, or bought your ham for Easter dinner a week ago, or bought swimsuits at then end of last summer YOU WERE SPECULATING.
Prices are dynamic across time. Buy cheap; sell dear. We all do it. There's nothing malevolent about it. Quite the contrary, it does everyone else a favor by shifting consumption of goods from when they are predicted to be (relatively) scarce to when they are thought to be (relatively) abundant.
Posted at 12:25 PM
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