06 May 2011


Notes toward what will become my chapter 16.

1. speculative bubble in crude oil
a. spring and early summer -- Masters' testimony
b. late summer and fall -- why the bust?
c. what policy consequences?
2. history of ethanol subsidies
a. broad coalition forms by 2010
b. Grover Norquist
3. peak oil? plateau oil? abiogenic oil?
4. realities and fantasies

Back to 1a above.

There was a bubble in crude oil prices in the summer of 2008. Some observers thought this may have tipped the US into the financial crisis of that autumn. Let's discuss this.

One school of thought in May 2008 (expressed by witnesses in hearings that month before the Senate Committee on Homeland Security and Governmental Affairs) was thgat institutional investors and commodity-price indexes had just recently become important factors in the determination of commodity prices, including those for food and fuels.

The chain of cause and effect would then be this. Various Wall Street entities such as Dow Jones, Goldman Sachs, Standard & Poors, created innovative commodity futures indexes. This allowed people or institutions to bet on an increase in commodity prices without actually having to buy something specific like cotton, or to trade even in specific derivatives such as cotton futures. No, the "index speculators" preferred to bet on the whole asset class at once, seeing it as "uncorrelated" with either bonds or stocks, and thus as a valuable addition to the portfolio.

As Michael W. Master, managing member of a long/short hedge fund, told the Homeland Security Committee, what was new about the index speculators was that they weren't concerned with traditional notions such as price per unit. They had made a portfolio allocation decision, and would "buy as many futures contracts as they need[ed], at whatever price [was] necessary," until all of the portion of their money that they had allocated to the commodities asset class was at work there. Thus, this was a form of demand separate from physical or commercial demand/supply calculations.

On January 2007 the Commodity Futures Tradings Commission changed the way it broke down its "commitment of trader" numbers, creating a new category for the newly-prominent index funds.

It is possible, then, that the sharp rise in certain prices beginning that spring owed something to the new indexes and to the rise of a new class of index speculator.

It is also possible, and I suspect probable, that the sharp rise combined a small effect from the rise of index speculators and a larger rise from old-fashioned directional speculators who thought that the index speculators would be a huge factor and who wanted to be on the same side as them.

But ... what about the sudden decline?


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