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About that signature...

By Fred Bethune on Tuesday February 8, 2011 11:17 AM


So… Krugman has written another post arguing against the the possibility that futures speculation drives up commodity prices without leaving a signature of inventory buildup, aka hoarding:

[T]his isn’t about a priori belief in markets; it’s about whether we see the “signature” of a speculation-driven price surge.

Many people on the “speculators did it” side like to point to financial data, especially large purchases of futures by various players. But food is a physical commodity, and plays in the financial markets can only move the price to the extent that they affect physical flows and stocks.

Commenters like Yves Smith may have the story right, but Krugman does pose a good challenge here. The basic economic theory is initially on his side, and the more intuitive approaches of Yves Smith, your's truly, and most of those on the speculation side of this argument do leave a lot to be desired.

I have a sort of theory in my head that brings together the short run inelastic demand and feedback from futures to spot prices in a way that could allow for speculative increases in price without hoarding. The problem is that trying to pull down this loose constellation and transmute it into algebra is really difficult for me and very time-consuming.

That still doesn’t change the fact that Krugman’s challenge really ought to be met. Even if we are right in fact, this is really the type of thing that we should still be able to disprove in theory. So far, nobody has presented a model of what Owen calls “immaculate speculation”, a speculatively driven increase in prices without inventory buildup...


Pull up a seat, folks, here’s the blogosphere premiere:

Speculation without Oil Stockpiling as a Signature: A Dynamic Perspective - Axel Pierru and Denis Babusiaux (April 2010)

Let’s see Krugman deal with that.

Comments (19)

How does one man write so many letters, spaces and punctuation marks... and have them all basically communicate this:

I am a drooling eedjit!!


I ask you, how does he manage that, with such impressive consistency?


The linked to paper seems to worry the inelastic short run to death

Yes if prices rises in hyper inelastic markets
there will be little inventory build up

But the models adjustment mechanism gives back the story
By suggesting immediate if small demand adjustment
Why should there be much of any
Adjustment could be more a matter of a year then a month to see
Inventory bulging

The ride up the price pole might continue for several quarters before
User/consumer demand can adjust
I recall car use was very sluggish in response to the huge pop in oil prices

Actually other then sacking pk in the back field here
The science strikes me as dismal
We simply have very inadequate pricing models

However we can pre empt bubbles
By clobbering these players with wind fall profit taxes and paper market transfer taxes

The oligs use the spec markets as cover stories
Just like weather in the ukraine

So recent spikes in food prices are due to speculation. And reductions in supply due to extreme weather events are an illusion? Am I reading this correctly?

I love economists... More fun than a coven of witches and their incantations make about as much sense.


"Actually other then sacking pk in the back field here
The science strikes me as dismal"

True. but hey, that's where Krugman has insisted on this argument being settled, in the backfield as you say. This is at least the kind of argument that he'll recognize and hopefully feel compelled to answer.


financial/futures mkts transactions and their effect uopn prices is not 'a model' or 'a story' but a matter of history which can actually be learned, even by those who believe otherwise.

posted and transfer prices within an oligopoly do not flow from mkt efficiency, keynesian, hotelling, etc, 'models' [see 'Seven Sisters' -and pre-opec price regimes by combo of transnat oilcos]

neither do cartel managed prices. [opec price management, moreless 1974-1985] after which benchmark oils prices became 'market related', progressively more determined by futures mkts, by finance not physical.

PK should read Robert Mabro's short Section 2 [Previous Oil Price Regimes] in the attached pdf or spend some time with The Oxford Institute for Energy Studies papers, or get a job with a larger oilco. http://users.ox.ac.uk/~sant0084/mideast/The%20International%20Oil%20Price%20Regime.pdf

oil storage can be/largely is subsurface whereas grains/other types of perishables can be/are held unregistered by large traders [see s asia, e.g.]as well as peasants.

for metals, see frank veneroso's 2007 WB presentation; Reserve Management
The Commodity Bubble, The Metals Manipulation, The Contagion Risk To Gold
And The Threat Of The Great Hedge Fund Unwind To Spread Product

coherent models are fine but should not ignore present day realities -- or maybe the model is thought to create reality.

signature; http://www.mongabay.com/images/commodities/charts/crude_oil.html

Solar Hero:

Hey! Least witches have integrity!

Krugman, working for the NY Lies, will "deal" with this as he has been taught: he will ignore it.


"So recent spikes in food prices are due to speculation. And reductions in supply due to extreme weather events are an illusion? Am I reading this correctly?"

Are you referring to the original post or op's comment?

I actually don't have much of an opinion on the current food prices. The extreme weather events story does seem plausible to me, but I haven't really looked into it.

Also, it's not necessarily one or the other. You could have a genuine supply problem be exacerbated by speculators who drive the price up even higher, and historically that's when it usually happens.

I'm more concerned with the 2008 oil spike and the theoretical argument over whether or not buying futures alone can move the price of a commodity. That could apply to the current spike in food prices, but I don't really know. The only thing I'm arguing is that it's possible, not that it's happening.



when you see percentage increases and a price curve parabola as in the attached while real global econ was far from strong, you are seeing speculative consequences -- it was not even a question, partic if studying the studies of it and speaking w/traders.


looking at index fund data, i've no reason to think the more current run, while somewhat less volatile, has not also been of the same.

"Also, it's not necessarily one or the other."

That was sort of my point. Thanks for the clarification, I think I misread your intent.


i agree

a historical account of these spikes
usually reveals a spectulative core

but as fb sez
the question here is modeling
the obvious reality

example triggering the model war ??

08 09 crude price ride
that's todays exhibit A

pk is basically still saying
do you believe
my model t
the records exhibit A
fb and I'd like to throw a model
back at him
not just amateur fropm the stands wanna be pig pilers
that at his own site chase him around the back field with utter futility


food commodities saw a similar pop and drop gig too back there

i know green types want some day of doom
pre figurations to get the pigou taxes rolling
but it won't be that easy
the GW science is already there to ignore

but green's like pk
now ignore
the price gouge/ bubble game
to drive home peak resource lessons

as to any interaction
between gouging specing and weather
with these cereal crops

sure why not

the oligops the price makers
love a nice pretext any pretext
to sky up prices

the prices of these basic utterly pervasive commodities
are always under public scrutiny
the threat of government intervention hangs forever in the air
so .....when a complete good guy like
a guy who still pounds his chest
over his cal electric call
agin the oligops
is making it easy for em right here
by saying "no not in this case "

even though this case is not about
deliberate " supply shocks "..
at any rate
not just the specs get to continue their side bets without uncle and company breaking up the crap game

the oligops get to pull down a nice big gouge

these prices are always contrived

in the case of a queen commodity like oil
its price
as i often mention has to both gouge
when it can
and since the 70's
dive when it needs to
recall subversion of the cost competition of any alternatives is job two for oilers

that's two comments i'm done
fb great post
i said nothing about our
persistent minor bird know nothing
playing horse tail once again
i think you can handle him without me

"i know green types want some day of doom"

Want? Hardly.

But sure, the population can keep growing forever. And it won't impact the environment at all.


Some folks don't want to face reality.


"but green's like pk
now ignore
the price gouge/ bubble game
to drive home peak resource lessons"

Thanks for writing that, OP.

Greens aren't reds.

It's not that the environment's not vital--of course it is. It's just that too many Greens don't mind accepting injustice as a tool to save the Earth.

Aristocracy is the time-honoured way of dealing with scarcity. If we embrace it, an enviro-mandarinate ("merit"-based, of course!) could save the planet in five minutes, but doom most people to subservience for centuries.


"It's just that too many Greens don't mind accepting injustice as a tool to save the Earth."

i don't think that's at all just

No environmentalist "plan" to save the earth will ever save the earth.

The earth will be just fine. All I'm trying to point out is that conditions are changing due to human activity and those changes will require the human race to adapt, culturally and perhaps even biologically.

There's nothing unjust about pointing that out.


It sounds like an electrical-engineering problem to me -- a matter of impedances and time constants. Does economic math use complex numbers? Phasors? Impulse-response characterization? "The economy" looks a lot like a physical system -- something with wires and capacitors and magnets, or friction and elasticity and inertia. Short-term response to a stimulus is one thing, long-term response quite another. The paper FB linked to took off promisingly, suggesting that the time horizon of analysis is crucial. Does econ math use the tools that engineers routinely deploy for describing situations like this? Serious question.


pk is basically still saying
do you believe
my model t
the records exhibit A
fb and I'd like to throw a model
back at him

gotcha op, but why wouid anyone assign weight to his [failed] model no matter how coherent it might be ? games and ideology?

if he's relying upon EIA inventory data, well:

'Brian Baskin, reporting for the Wall Street Journal last Friday [march 2010], used internal Dept. of Energy documents to uncover what he said were errors in the Energy Information Agency's weekly inventory report, "including one (last) September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors."
The essential statistical methods used for the WPSR have not been reviewed and tested since their inception over 30 years ago.”


same can be said for the IEA [formed as oecd partnership which has had mistakes galore].

A recent report about undue pressure by the US on the IEA, to distort crude oil projection figures is rather unsettling. The report, citing a whistleblower at IEA, indicated that the United States influenced the agency to underplay data,...

First is the issue of credibility. If (and really if) the claim of such undue influence were true, just how often has that occurred in the past?

Secondly, there is the issue of underlying criteria employed in forecasting. Different models employ different criteria, which often lead to different forecast figures. Some of these criteria however, may be unrealistic.

Even within a professional community, there may hardly be any agreement. For example, IEA’s survey of the rates of production for about 800 major oilfields around the world concluded that global oil supplies are declining at 6.7% per year which is about twice the previously given rate, but IHS CERA’s survey held that “sixty percent of the more than 1,000 fields examined in detail for the study were found to have production levels that were either steady or climbing.”

Third, various analyses on the accuracy of forecasts (forecast versus observed figures) have also led to various interpretations, and many are not encouraging.


although i guess we're dealing w/inventory in the abstract and a model which need not account for changes in price regimes and forms of organization - an ahistoric model which serves no purpose other than justifier.

in the past, my only 'model' consisted of
staying ahead of/ current with global and regional econs and contradiction between these and energy production, the dif energy imports/exports, uses, costs, build - or not - of refineries, types of oil used/to be used, prices and so forth.

additionally, the various ongoing stories [China growth, Iraq, Nigeria, Ven, upcoming weather,'peak oil'], monthly trade data, what traders had to say, greater {or not} media green emphasis, CFTC data, LIPE beome ICE, nymex announcements, partic firms such as Shell and/or Valero, S. Aramco, eia and the oil drum, rigzone, platts ------- lots of detail blended w/the global-regional, all to 'see' the contradictions, the movement.

finally, couple of moving averages which worked well until the index funds began pouring in.

right, hardly a model.


Juan I put u in. Charge of the food commodity watch
It will make a nice side line to energy



I think that some of the concepts may be analogous but most of those aren't used in economics. AFAIK it's all real analysis, no complex analysis. I think that inertia, impedance and time constants make a pretty good analogy here, and this is right:

"Short-term response to a stimulus is one thing, long-term response quite another. The paper FB linked to took off promisingly, suggesting that the time horizon of analysis is crucial."


Mostly to get my own thoughts in order, I'm going to try to explain what this paper means:

Elasticity of demand in economics refers to the change in quantity demanded relative to a change in price.

elasticity = % change in quantity demanded / % change in price

If you have an elasticity of 1, then a 1% change in price leads to a 1% decline in demand. If you have an elasticity of 0 (perfectly inelastic) then no matter what the price is, the same amount is demanded.

In this case, the estimated short run elasticity of demand for oil is -0.05. Say oil increases in price from $75 to $150, then you could figure out how much demand would decline at the end of say one year:

elasticity = % change in quantity demanded / % change in price
0.05 = % change in quantity demanded / 100
% change in quantity demanded = 5%

Because the system is so "addicted to oil" and it's hard to find alternatives that can be substituted, even if oil doubles in price, the quantity bought only declines by 5% by the end of the year. In the long run of say 4 or 5 years (when people start buying more efficient cars etc) you would approach an elasticity of -0.22, meaning that if oil doubles today and stays at that prices, years from now we would only reduce oil consumption by 22%.

The point that this paper makes is that those elasticities are only realized slowly and continuously. In the very short run of say one week, the elasticity of demand may be almost nothing, say 0.001 (if the price doubles, demand only declines by 0.1%).

Krugman claims that even if futures push up the price of oil, the market for physical oil still has to clear at that price, or the excess oil has to be stored by someone. He basically says "See, people are buying the oil, and no one is stashing any extra, so price has to be in line with supply and demand fundamentals".

The paper argues that those fundamentals only become manifest over time, so in the short run the price could deviate very far from long run fundamentals without a decline in demand that would require someone to take the leftover oil and keep it off the market.

Basically, speculators can push up the spot price by buying futures, and only gradually is it determined whether or not the fundamentals can support the price. People may be able and willing to pay twice as much for gas the week that it doubles, but over the longer term they may not be able to afford it, and may shift to a smaller car or public transit.

The point is that there's little immediate demand response of the kind that Krugman seems to assume. Hoarders only have to make up for a decline in demand that happens very slowly at first, so there might not be any inventory accumulation for a while. If the price spikes and declines quickly, there may may be no discernible change in inventories at all. It could just be a kick in the pants for consumers and a windfall for speculators and oil companies, since due to the low elasticity of demand, they basically have the consumers over a barrel (har har)

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