Explaining Oil Price volatility

As when I looked at who owned the dole offices the other day, I think that it would help readers confused by some of my meanderings to go to sites that try to follow money. In the case of oil markets, for instance, I have been holding forth on how peak oil--the end of oil at viable prices--does not just mean rising prices, but disrupted and volatile prices. Low ones make discovery and refining uneconomic; high ones make supply and distribution (and purchase) problematic.

This matters because, from the fertiliser that grows food under lights powered by oil to the wrapping and plastic that protects it, and the petrol that gets you to it, we have built a society around oil.

Oil prices aren't just about complicated supply, complemented with refinery numbers and operation. They are also affected by demand; and one of the most significant things in the history of the past two centuries has been the return in our own time of economic sovereignty and dominance to Asia. The rebalancing of the world, disturbed by European imperialism four centuries ago, is ongoing, and profound. In real time, over two billions of people are now demanding oil in quantities not demanded before.

However, a third factor is also at work. Initially, oil producers, refiners and distributors became involved with derivative markets and other funding or money-movement mechanisms to buy time and to allow for margins around trades.

Now, as Chris Cook shows here, oil derivatives and financing markets have become sociopathic, and are only concerned with the propagation of arbitrage. For everyone who thinks that oil and microeconomically-defined markets explain 'oil shocks' therefore, the facts of the operation of the market suggest different.

So, to explain oil price, set aside the ideological reading of economics and add up these four factors; 1) supply, 2) Asian demand, 3) derivatives and funding 4) political and monetary shenanigans.

The result of that addition, I would suggest, is that oil prices are highly volatile, and whilst connected to the global economy, showing serious signs of the predicted peak oil curve.

That's why I've been going on about oil for three years, and why I replied as I did to my friend Martin Kelly when he mentioned Vince Cable's 'oil demand shock' idea the other day in the comments. I love blogging. It makes me think when I am inclined to be lazy or obscure, though whether the results are any less so is a judgment for others.


Anonymous said…
The wealth disparity in OPEC member nations is appalling and very clearly indicates whose hand is on the spigot...
Martin Meenagh said…
Hi Anonymous

wealth disparity within opec member nations is very great. I'm not so sure that there is any state hand on the spigot that can stand against markets or geology either, otherwise the US and Saudi Arabia would run absolutely everything. Instead, the United States began under Bush and Cheney to build up the strategic reserve of the united states in what seemed a frankly fearful way, and the Saudis seem to spend their time funding islamic fascists against other islamic fascists whilst attempting to purchase a middle class (and good luck to them in the latter). They're both such cultures of fear when it comes to oil....

There is a good argument that, in the long run, producing oil is bad news for a country. It's the modern form of banana republicanism, largely because it tends to corrupt and to displace all other economic activity. On the other hand, its clearly vital for the sort of society we've been building since the oil age began in, what, 1859, 1900?

I think that global wealth disparity and the development of a planet of slums at this moment in history is key to understanding our present multiple crises. The rich world has borrowed and spent too much, without limit; and the poor has been junk fed on subsidy and dumped agricultural goods whilst shut out of their own growth in Africa. The Asians, well, they just work hard and have a degree of governmental stability.

I still reflect on a serious question; if this planet, with all its resources and the all the ingenuity of humanity, and all the development at this time, can feed ten billion--why are three billion subsisting in a living hell?

Why are the other three billion worrying about weight, or population control, or rubbish about global warming and climate change and other ways to divert themselves from a duty to do something about global poverty? And why does the most obvious thing--leaving countries alone to be free, and helping them out with a rule of law and a tolerance of internal agricultural subsidy, or completely open trading, since either would do--never get discussed?
Martin Meenagh said…
Just to clarify--I took your point about disparity between member nations, but wanted to add a point about disparity within them.