Wishful thinking at the Economist
Tony Curzon Price
In 1990, the former Wall Street trader Jim Rogers (interviewed here by Jonathan Davis, 15 March) set off to circumscribe the globe astride a large motorcycle. He returned in 1992 having pondered the meaning of life — and the answer was ‘commodities’. As a player of markets, he did not have to do anything so practical as to go out and drill or mine. He just kept buying more commodity futures — a gigantic bet that commodity prices would rise. He was right, and became hugely wealthier as a result.
But as the price of oil, the world’s most essential commodity, continues to rise, listen for the sound of market ideologies creaking under a weight they cannot bear: for example, in the Economist’s editorial last week. ‘Speculators do not own real oil... [They] may raise the price of “paper barrels”, but not of the black stuff ... inventories are not especially full just now and there are few signs of hoarding.’ Jim Rogers and his imitators are off the hook, it implies, and the problem is with the fundamentals of supply. But why can’t the Economist shake its faith in functioning markets? How can it be so wrong about speculation in oil?
Ten years of housing bubble have taught us that when prices are expected to rise, everyone selling wants to wait and everyone buying wants to rush. So houses become scarce in the market, and a belief that prices will rise makes them go on rising. When the Economist claims it sees no signs of hoarding, it is asking, ‘Where, for oil, is the equivalent of Aunt Gladys, waiting for the very last moment to sell the family house?’ First, look at Saudi Arabia. Between 2007 and 2009, it had planned to bring on two new fields, Khursaniyah and Shaybah, adding almost half a per cent to world production capacity — the equivalent of the whole of China’s oil-demand growth for 2008. Aramco, the Saudi state oil company, alone could increase production by 2 per cent of world demand: its promised increase of 200,000 barrels per day is just one tenth of its excess capacity.
For more sightings of Gladys, watch the oil tankers bobbing about the Gulf. A popular flutter among the gambling rich recently has been to hire a tanker, fill it with oil (it will hold two million barrels) and park it in front of a refinery. Watch the price; if you lose your nerve, you can quickly dock and sell your cargo; but a $1 rise means you’ve netted $1.5 million. During the 1979–80 oil shock, 30 tankers were famously moored off Manhattan. Their owners spied on each other for any sign of movement until market spirits fell abruptly, and all 30 simultaneously raced to dock.
The Economist’s view that all is for the best in market-land is plain wrong. Oil is being hoarded. So can we blame sheikhs rather than Wall Street shakers? No. When Aramco decides whether to turn the taps, it judges whether its oil will be worth more later. As it sees speculators continuing to buy, it is confident that prices will continue to rise. When Goldman Sachs talks of $200 oil by year-end, then like Gladys with her house, Aramco waits.
Aramco knows that prices will eventually fall back below $75 — the price at which vast amounts of alternative energy supplies become viable. Between 1981 and 2003, OPEC worked hard to set oil prices at the limit that made competing sources uneconomical. Increased demand from China has been absorbed barrel for barrel by increased Russian and Central Asian production. Supply has had no fundamental trouble keeping up with demand. At will, Aramco could take us back to production levels that once delivered oil at $30.
So if you want to understand oil heading for $150 and over, better look instead at financial markets. The long real-estate bubble has ended with a weakening dollar, world inflation and safe investments such as Treasury bonds earning less than nothing. You don’t bring commodities out of the ground when returns on investment are so low elsewhere. On top of that, when you buy commodities, you have a feeling that you are getting something real; something, unlike fancy mortgage-backed securities, that the world will always want. So naturally, portfolio managers have reacted to the subprime crisis by abandoning credit derivatives and buying commodity funds instead. The ensuing high paper prices have only encouraged producers further to moderate production.
So why does the Economist find it so hard to admit oil market speculation? Because to do so drives a tanker through faith in markets. Oil prices are high because of a series of self-feeding beliefs, which, as George Soros says, are ‘intellectually unsound, potentially destabilising and distinctly harmful’. We are living through a period of instability which will bury the notion that financial markets can benevolently look after themselves. But after the funeral, where will market fundamentalists find their moral compass? It is the fear of this loss that makes ideology creak as the oil price balloons.
Previous page
