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That's interesting, but how is any commodity able to have it's price pushed down by a single seller dumping from a fixed reserve? If the market notice that the

That's interesting, but how is any commodity able to have it's price pushed down by a single seller dumping from a fixed reserve? If the market notice that the extra supply is coming from a fixed reserve, then they'd rightly be able to infer that at some point the supply will run out, and prices will return to market value, which would in turn drive up prices again. It probably won't go back to the previous equilibrium price because of the cost of storage and interest, but it should be close.

learnstats2 11y ago
But this does work in practice - it basically describes OPEC's current strategy, and perhaps relates to Starbucks' ongoing market strategy, etc. The price may return to the equilibrium price at some point, but the single seller is able to hold it low for as long as they have reserves to dump. If other sellers are dependent on sales, then they must compete.
- refurb 11y ago
  it basically describes OPEC's current strategy Not really. OPEC's strategy is one of production. Based on their reserves, OPEC could keep it up for decades. If you're dumping a strategic reserve, it has a limited time span and likely the market can estimate how long since the reserve was public info.
  - jameshart 11y ago
    OPEC's strategic reserve is also kept underground - just where they found it.
    - refurb 11y ago
      True, but OPEC's reserves are measured in decades of production, not like the US reserve. Unlike the US reserve, OPEC's strategy is not quite as time constrained.
pjc50 11y ago
The price of any commodity is the price at which the marginal unit clears. Given that production tends to be very inelastic and planned a long time in advance, in the short term it can be pushed around quite dramatically. It's also not at all easy to work out who's supplying what in such a giant market. (Look at the huge 2008-2009 swing, for example)
Spooky23 11y ago
Drive down to the port or rail yard in your town. Notice the tanks used for wholesale petroleum product distribution. The distribution system needs to be in motion at all times. Flooding it with supply demands a faster liquidation of the product.
IkmoIkmo 11y ago
Indeed, that's interesting. For example, for oil, the US has an annual cost of $0.2b for storing about $44b worth of oil i.e. a 0.45% annual cost. You'd expect if the reserves are dumped for an entire year for example, that smart investors would be happy to start paying a 0.45% annual cost once the price drops by slightly more than that. At 5-10% at such a scale, despite other price fluctuation risks, that's already a significant arbitrage opportunity that would generate enough buying power to put a floor under a small price drop. That having been said, the US actually ran a planned long-term programme for oil storage. But if someone suddenly floods a market, there probably isn't infrastructure and expertise to immediately seize that as an arbitrage opportunity. If it happened every few years then there'd be tons of cheap storage, if it happens once every few decades, then sudden gluts probably dump the price with little capacity for investors to immediately buy back in. And this is coincidentally a few years short of derivatives taking off on a big scale, Allende died the year of the Black-Scholes model, which would've made everything more frictionless and easier to invest and trade in for the various parties (producers, investors, storage, buyers etc) Of course it wasn't the only factor, it may have dropped prices by a few percent and that's already very significant. Remember that a lot of US employees and advisers left the country after the copper industry was appropriated, replaced by people with very different backgrounds and no experience to manage these companies. I've seen some sources that said the price of production went from 20 n something cents to 40 n something cents, while the price on the market was something like 49 cents. Profits were squeezed hard. Combined with sanctions on Chile (much of Chilean copper went to the US, Europe and Japan, big allies who could impose quotas and tariffs), a small price drop due to extra copper flooding the market and similar issues in other markets, could and indeed did create layoffs, economic woes and friction in Chilean society.
BookmarkSaver 11y ago
It doesn't permanently go down. But if that single seller is selling at way under the previous market price, that is what everyone is going to be paying until they run out of their supply. If this lasts long enough, it could be enough to drive entities dependent on copper production out of business or into a collapse as the price they are forced to sell at isn't profitable. Once that point is reached it doesn't matter if the price goes back up when the single seller runs out, the damage has been done.

learnstats2 11y ago

But this does work in practice - it basically describes OPEC's current strategy, and perhaps relates to Starbucks' ongoing market strategy, etc. The price may return to the equilibrium price at some point, but the single seller is able to hold it low for as long as they have reserves to dump. If other sellers are dependent on sales, then they must compete.

refurb 11y ago
it basically describes OPEC's current strategy Not really. OPEC's strategy is one of production. Based on their reserves, OPEC could keep it up for decades. If you're dumping a strategic reserve, it has a limited time span and likely the market can estimate how long since the reserve was public info.
- jameshart 11y ago
  OPEC's strategic reserve is also kept underground - just where they found it.
  - refurb 11y ago
    True, but OPEC's reserves are measured in decades of production, not like the US reserve. Unlike the US reserve, OPEC's strategy is not quite as time constrained.

pjc50 11y ago

The price of any commodity is the price at which the marginal unit clears. Given that production tends to be very inelastic and planned a long time in advance, in the short term it can be pushed around quite dramatically. It's also not at all easy to work out who's supplying what in such a giant market. (Look at the huge 2008-2009 swing, for example)

Spooky23 11y ago

Drive down to the port or rail yard in your town. Notice the tanks used for wholesale petroleum product distribution. The distribution system needs to be in motion at all times. Flooding it with supply demands a faster liquidation of the product.

IkmoIkmo 11y ago

Indeed, that's interesting. For example, for oil, the US has an annual cost of $0.2b for storing about $44b worth of oil i.e. a 0.45% annual cost. You'd expect if the reserves are dumped for an entire year for example, that smart investors would be happy to start paying a 0.45% annual cost once the price drops by slightly more than that. At 5-10% at such a scale, despite other price fluctuation risks, that's already a significant arbitrage opportunity that would generate enough buying power to put a floor under a small price drop. That having been said, the US actually ran a planned long-term programme for oil storage. But if someone suddenly floods a market, there probably isn't infrastructure and expertise to immediately seize that as an arbitrage opportunity. If it happened every few years then there'd be tons of cheap storage, if it happens once every few decades, then sudden gluts probably dump the price with little capacity for investors to immediately buy back in. And this is coincidentally a few years short of derivatives taking off on a big scale, Allende died the year of the Black-Scholes model, which would've made everything more frictionless and easier to invest and trade in for the various parties (producers, investors, storage, buyers etc) Of course it wasn't the only factor, it may have dropped prices by a few percent and that's already very significant. Remember that a lot of US employees and advisers left the country after the copper industry was appropriated, replaced by people with very different backgrounds and no experience to manage these companies. I've seen some sources that said the price of production went from 20 n something cents to 40 n something cents, while the price on the market was something like 49 cents. Profits were squeezed hard. Combined with sanctions on Chile (much of Chilean copper went to the US, Europe and Japan, big allies who could impose quotas and tariffs), a small price drop due to extra copper flooding the market and similar issues in other markets, could and indeed did create layoffs, economic woes and friction in Chilean society.

BookmarkSaver 11y ago

It doesn't permanently go down. But if that single seller is selling at way under the previous market price, that is what everyone is going to be paying until they run out of their supply. If this lasts long enough, it could be enough to drive entities dependent on copper production out of business or into a collapse as the price they are forced to sell at isn't profitable. Once that point is reached it doesn't matter if the price goes back up when the single seller runs out, the damage has been done.