At the present price of around $57 per barrel the oil price has fallen quicker than I would have anticipated which is due maybe to futures traders activities, or perhaps more likely to be a combination of weaker demand and speculative trading in oils non transparent traders market. A trader need only put down a very small amount and borrow the rest to create the highly leveraged position which can help either drive prices up or down.
I don’t believe speculators serve any useful purpose other than to profit by manipulating a market at the expense of normal supply and demand principles. In turn this makes sensible investment decisions virtually impossible which is much more damaging than most folk realize. I think we need to clamp down on these jokers instead of just blaming oil producer nations for high prices that may have nothing to do with them. Bear in mind also the current oil price is 60% below its long term inflation adjusted price.
In so far as the speculation is concerned I think even the hardest headed economists can no longer be in denial, they must now all freely admit to the huge price distortions that have permeated markets for some considerable time. The speculators had the added advantage that many were lulled into a false sense of certainty about the inevitability or rising oil prices. Many advocating the ‘peak oil theory’ confirmed authoritatively we had reached the so called tipping point (falling supply could no longer satisfy existing demand) so it was virtually impossible for prices to diminish. Well so much for the immeadiacey of that theory; it looks like the price has fallen by 67%. The speculators also knew that we don’t have the information about the worlds known reserves as most producer countries refuse to divulge them. We don’t even know what the stockpiles of oil are applicable except in the USA. Even so, personally, I think oil will increase in a few years.
But before investors are asked to fork out their hard earned money into alternative energy enterprises by way of direct investment in shares or governments concede substantial subsidies for consumer to pay higher utility costs for government funded alternatives they also need to make sensible estimates about the long term price of oil. Make a wrong guess and it will bankrupt many investments whose prospectuses are reliant on false assumptions or severely disadvantage consumers in some countries should oil be so much cheaper than what was estimated. Anyone betting on $35 a barrel?
A long time ago Allan Greenspan argued very strongly to congress against any form of regulation of derivatives trading for the relatively newly formed but growing insurance derivatives called credit default swaps. Hence the market for these insurance based derivitives were never transparent nor was it regulated.
If there is one golden rule that has since been learnt about markets during the current unprecedented turmoil it is the critical need for transparency and regulation in all markets, including oil.
Simply put the need to know what’s going on so as you give yourself the opportunity to intervene, (as undoubtedly you will need to do) and have needed to do in all of the so called free markets from time in memorial.