Comment by jeromec | Hacker News Reader

Comment by jeromec | Hacker News Reader

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Don't forget that speculation works both ways. It can also bring down prices very quickly and consumers benefit from that.

That's like me expecting you to say "thanks" for returning an item I took from you when it's speculation which helped drive up prices in the first place.

What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects.

That's exactly what it does. Why do we need that?

It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues.

React early and do what? This isn't like hurricane preparedness. Again, the point the article is trying to convey is that prices don't reflect supply and demand. We experience sky rocketing gas prices but no longer see gas shortage or rationing lines. In 2008 we had significantly more people go hungry from food shortages, although nothing has changed about wheat farming except, if anything, farmers producing it more efficiently. The wheat harvest that year was the most bountiful the world had ever seen.

I think we need a component of future expectations in prices because it increases incentives and provides funding for averting real future shortages.

I think we need a component of future expectations in prices because it increases incentives

I'm extremely wary of the term "increased incentives" in light of recent events sparked by this model on Wall St.

and provides funding for averting real future shortages.

We just don't see gas lines to support that argument.

Edit: And what do you mean "provides funding" anyway? Speculative contracts don't raise oil producing levels, nor stockpile oil (as our Strategic Reserve does). The extra money which exists is all used up by the speculators playing the game.

General anti Wall St. sentiment is not a very potent argument. It's difficult to deny that higher prices increase supply and/or destroy demand. Wall St. didn't invent this logic.

General anti Wall St. sentiment is not a very potent argument.

I'm not anti-Wall St. But I am anti-recklessness when it means wreaking havoc on our national (and by extension entire world) economy.

It's difficult to deny that higher prices increase supply and/or destroy demand.

No, it's not. Actually, higher prices usually mean there is decreased supply and increased demand. That's in a normal market. But we don't even have a normal oil market. That's the entire point. When oil prices skyrocketed to record levels above $145/barrel in 2008 it wasn't because of increased demand, and those astronomical prices didn't mean an increased supply of oil either.

He is saying that "higher prices -> lower demand" You say that, "no higher demand -> higher prices"

Both are true

I think our misunderstanding is that you're talking about what has happened and I'm talking about what is resulting from it. Higher prices mean that demand has been growing faster than supply. As a consequence, suppliers now want to supply more and consumers want to consume less. So higher prices incentivise more supply.

Higher prices mean that demand has been growing faster than supply.

But that's not the cause of our higher prices. Listen, I can't keep arguing this. Do me a big favor and just read the first 3 paragraphs here:

http://useconomy.about.com/od/commoditiesmarketfaq/p/high_oi...

As a consequence, suppliers now want to supply more and consumers want to consume less.

Suppliers want to supply more. So, if you're some Saudi Arabian sheik witnessing these astronomical oil prices you really want increase oil production and supply more? What will that do to oil prices? Think about what you're saying.

Exactly. If I'm an owner of an oil field I prefer to sell at higher prices and if prices are high I invest more in exploration.

Of course prices are not just influenced by supply and demand. They are also influenced by speculation. I never denied that. What I'm saying is that speculation changes the timing and increases the volatility, but it cannot decouple from supply and demand indefinitely.

So if we're running out of easily accessible oil in, say 20 years, and speculation increases today's prices in expectation of that, that's a good thing. Of course it is a double edged sword. Sometimes future expectations never materialize and speculation ends up destroying value.

High oil prices make alternatives economically viable so they get funded. It's pretty simple.

Oooh, it's a bit of a slippery slope to try to argue that. A shift in political winds and/or attitude can cancel/limit alternative energy funding in a heartbeat.

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