Well, now people are wondering why oil price climbed so high, then fell so low. They blame it completely on speculation.
Which is definitely part of the problem.
The thing about crude oil is: demand has dropped a LOT very suddenly. And supply cannot contract by the same amount.
...
Let's take a look at the underlying "psychology" or game theory behind oil prices. Let's take 2 players in a game. In the first game, both sides know that the BUYER requires 100 Oil, on pain of death, no matter what price. The seller, from a position of strength, charges $150 per oil.
2nd round, the buyer announces that he only wants to buy 90 oil. The seller then reveals that he MUST sell 100 oil, on pain of death. Oh dear. Of course, we now see this reversal causes the buyer to massacre the seller, at $30 per barrel.
Admittedly, this is not actually how it works, there is some long complicated mechanism to it... but this is just another way of looking at the overriding forces of demand and supply, simpified to extreme levels.
Cause at the end of the day, though there may be a lot of traders in between, let us not forget that at the end of the day, the oil starts from the producers and ends at the consumers. There's just a lot of stuff in between.
Let's go back to basic economics, shall we?
Remember your demand and supply graph? Let's draw those.
Unfortunately, looking at the graph, we suddenly realise that the DEMAND is extremely price inelastic! No matter what the price, if the economy is overheated, price barely make a dent in demand.
Now, the Arab nations have revealed that SUPPLY is also price inelastic! Their economies depend on oil so much, they MUST sell at near maximum output, even at a loss!
So, when you have these extremely inelastic demand and supply lines, what happens when the demand line is shifted to the right or left? (reflecting total rise/fall in demand)
You have rather ridiculous shifts in price, that's what.
Very very basic economics.
Labels: crude oil
