A Follow up on the Futures Market and Gasoline Prices

You may have noticed gas prices have started to drop slightly, which is unusual going into summer. It may be a temporary blip, but there is evidence to suggest it is an ingrained trend. Namely, the price of a gas futures contract is dropping, which means the market expects gas prices to decrease (perhaps the evil speculators were convinced to stop profiteering). While future expectations aren't always correct, there is good evidence of them being among the best unbiased predictors of future prices. 

Economist Menzie Chinn calculates that the futures market is predicting prices to continue drifting down to $3.50 a gallon by years end (see graph above). If correct, it means the highest gas prices for the year are already behind us.

Facts on Oil Speculation

Gas prices have returned to about the level they were in 2008 before the economy went into recession. As with every other time gas prices get high, politicians and similarly misinformed people are blaming speculators in the oil markets. Such statements have risen to the top of government, with Barak Obama saying:

“We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”

More ignorantly, Joseph Kennedy suggested baring speculators from the markets outright:

“They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.”

Saying ignorant statements for political expedience is no excuse; many people end up believing it. And from their passion for the topic, I suspect these politicians truly do believe it. This is despite the fact that a economics refutes their claims, or at the very least offers no evidence at all to back them.

Here are some facts about speculation:

1. The increased number of speculators in oil markets does not necessarily increase prices.

2. When a speculator buys a futures contract for oil, it means there is also a seller. If purchasing a futures contract increases the price of oil, selling the contract would reduce the price.

3. However, if the market expects the price of oil to rise, the price of futures contracts will rise. This will create an incentive for suppliers to take some oil off the market today to sell at the higher future price. But this is merely the smoothing of a price shift due to a change in supply/demand equilibria.  

4. If speculators were artificially driving prices significantly higher than their supply/demand equilibrium, it would reduce demand, causing producers to reduce supply. In the short term inventories of oil would build up due to a lag in the reduction of supply, which isn't happening.

5. No economic study has found that either the number or positions of speculators have increased average prices of oil.

If you would like the details…

Race for the President of the World Bank Group

The race for President of the World Bank Group is on. Of all the previous presidential races for the Bank, this is the first one I’ve heard of before it had already happened. This is because of the long standing tradition that the president be a citizen of the United States. This exists because voting power is roughly proportional to GDP size. The U.S. and Europe have long been able to dominate any vote they agree on. In return for Europe agreeing that the World Bank President be American, the United States agrees that the head of the IMF be European. This unofficial agreement held up recently when the French head of the IMF was replaced by France’s Finance Minister. So what’s all the noise about?

Obviously, this unofficial policy has few supporters among the rest of the world, and calls to end it have become increasingly vocal. The policy is corrupt, misguided, and undermines the credibility of the Bank in the developing world (on top of the Bank’s actions undermining itself). And the rest of the world does not lack in qualified applicants. The bank often preaches in favor meritocracy and against corrupt political horse-trading, but does so itself.

March Jobs Report

The economy in the United States added only 120,000 jobs last month according to the BLS. Many analysts and forecasters had expected over 200,000 jobs added, but anyone keeping track knows they have been uselessly inaccurate as of late. The numbers for January were revised down, and the numbers for February revised up, for a net of basically no change. The unemployment rate dropped due to people dropping out of the labor force. While there were many encouraging signs and statistics over the past month, GDP growth had slowed from the annualized rate of 3% seen in the fourth quarter of 2011. There was a disconnect between job numbers and GDP numbers, and it turns out now that the job numbers were the ones out of sync.

The same thing happened last year; a winter of solid job numbers ended with spring. So this past winter’s numbers seem to be more of a seasonal phenomenon rather than a lasting improvement in the economy and labor market. Additionally, the unusually warm winter could have thrown off seasonally adjusted figures to overstate growth. It’s certainly bad news, when this happened last year it was explained away by harsh winter weather in the northeast and the tsunami in Japan. Neither of which happened this year. A bumpy recovery was to be expected, but the further out we are from the recession, the worse it is to be standing in the same place.