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I heard a great interview on C-SPAN yesterday morning (I can't find a reference, sadly) with an economist preparing to testify to Congress that the chief proble

I heard a great interview on C-SPAN yesterday morning (I can't find a reference, sadly) with an economist preparing to testify to Congress that the chief problem with prices is that they are not currently based on supply and demand. His argument is that pricing is being driven by largely unregulated speculation via the "Enron loophole" providing unsupervised markets in which to buy and sell between speculators for the primary purpose of artificially increasing the value of the asset. If this is true, then Friedman would be repeating the supply problem as the chief factor in increases when that might only be part of it and might not be the biggest part. The economist also claims that increasing supply will have a disproportionately small impact on the cost because the cost is not being principally set by supply vs. demand and therefore it would just provider larger hordes of strategic assets for the companies engaged in this practice who are hedging their positions against the dollar decline. Is anyone smarter (and sexier!) than me able to bolster or refute that claim?

nostrademons 18y ago
I've heard varying opinions on the claim that speculation is driving up prices instead of supply & demand. Economists seem split down the middle, with some saying that it's all traders stockpiling oil in anticipation of future price increases and some saying it's rising demand from India and China. Personally, I believe it's speculation, but that's only because every other time we've seen a 50% rise in price over 6 months (housing, dot-com) it's been a bubble rather than a sustained increase. This is one of those things that it's impossible to know for sure either way, since secret market manipulations are by definition secret, and anyone who knows has a vested interest in not telling you. Regardless, Friedman's point holds either way. If it's a supply problem, then a gas price floor encourages the development of efficient vehicles and alternative energy technologies, providing us with alternative supply sources. If it's a demand problem, a gas price floor reduces our consumption demand, and then India and China can go deal with the troublesome states in the Middle East (let them handle Iraq!) If it's a speculation problem, a price floor encourages development of alternative energy, which cuts demand for petroleum and ends up causing a price collapse, with speculators left holding the bag.
- ericb 18y ago
  My father was in charge of purchasing the natural gas (which is intertwined with oil at the extraction and pricing levels) for most of Rhode Island for years. When I ask him about this, he says capacity comes on only slowly because of the massive investments involved and time to build out, so supply lags demand, which is why prices go from a buck a gallon to four in a few years. Yes, it's more profitable to increase capacity, but if you decide to invest now, you don't see the benefit for years and in the meantime, prices are high. If everyone decides to increase capacity, and it comes online all at once, prices fall apart. It's an interesting game theory problem in that regard.
mhb 18y ago
How speculation may be contributing to oil prices (thoughtful): http://news.ycombinator.com/item?id=202498 http://news.ycombinator.com/item?id=202498

nostrademons 18y ago

I've heard varying opinions on the claim that speculation is driving up prices instead of supply & demand. Economists seem split down the middle, with some saying that it's all traders stockpiling oil in anticipation of future price increases and some saying it's rising demand from India and China. Personally, I believe it's speculation, but that's only because every other time we've seen a 50% rise in price over 6 months (housing, dot-com) it's been a bubble rather than a sustained increase. This is one of those things that it's impossible to know for sure either way, since secret market manipulations are by definition secret, and anyone who knows has a vested interest in not telling you. Regardless, Friedman's point holds either way. If it's a supply problem, then a gas price floor encourages the development of efficient vehicles and alternative energy technologies, providing us with alternative supply sources. If it's a demand problem, a gas price floor reduces our consumption demand, and then India and China can go deal with the troublesome states in the Middle East (let them handle Iraq!) If it's a speculation problem, a price floor encourages development of alternative energy, which cuts demand for petroleum and ends up causing a price collapse, with speculators left holding the bag.

ericb 18y ago
My father was in charge of purchasing the natural gas (which is intertwined with oil at the extraction and pricing levels) for most of Rhode Island for years. When I ask him about this, he says capacity comes on only slowly because of the massive investments involved and time to build out, so supply lags demand, which is why prices go from a buck a gallon to four in a few years. Yes, it's more profitable to increase capacity, but if you decide to invest now, you don't see the benefit for years and in the meantime, prices are high. If everyone decides to increase capacity, and it comes online all at once, prices fall apart. It's an interesting game theory problem in that regard.

mhb 18y ago

How speculation may be contributing to oil prices (thoughtful): http://news.ycombinator.com/item?id=202498 http://news.ycombinator.com/item?id=202498