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As oil prices once again come close to $100 a
barrel, some people may wonder why.  Is there a
shortage of oil? Is demand growing? Or is there
price manipulation in the market?

(continued from Oil Manipulation Part One)

But can futures market manipulation affect the true
cash or spot price of oil? It can if, for instance,
suppliers believe the futures price movements truly
reflect the “correct” market and horde their oil in the
hope of higher profits later. This lowers supply and/or
raises price in the cash market. Or if those in the
supply chain become convinced that their costs will
really be higher and they need to raise current prices
in anticipation of this. So if futures market
manipulation influences spot market participants to
take real action, then perhaps the futures market
manipulation can affect spot prices, and affect the
lives of the everyday consumer. At least these have
been suggested scenarios.

Any scenario such as this is market manipulation. Of
course, at some point prices should return to their
supply/demand equilibrium, although it may take a
while.  Why? Because even if some investors have
enough money to artificially drive up prices in the
futures market, at some point in the future, buyers will
know whether the previously assumed supply and
demand conditions are true or not. In addition, if the
price was manipulated upward, suppliers may have
taken steps to increase production. This may lead to
overcapacity, which may well lead to prices lower than
they were initially. So this market manipulation can
lead to a bubble and burst phenomenon.  Some
believe this is what happened in the run-up of oil
prices from 2004 through mid 2008 and their
subsequent crash by the end of 2008.       

Others believe that the oil markets performance over
the past few years is consistent with efficient markets
- markets in equilibrium. Efficient markets can
fluctuate wildly. Demand did grow significantly over
the last few years, driven primarily by demand in
China, India and other Asian countries. Supply has
largely kept pace with this demand. For every
prediction that the world is running out of oil, there is
one discussing the multitude of new discoveries, and
how certain large types of fields become economical
to build out at current and higher prices. These other
predictions point to decades and even centuries of
remaining oil even given significant demand growth.
And this says nothing of any possible future
efficiencies created and conservation efforts
undertaken.      

A big key here can be what is called elasticity of
demand. What is it?  It is the ratio of percentage
increase in price to the given percentage increase in
demand. The higher this ratio, the greater the price
change/shock from any given change in demand. This
applies in reverse as well, as the rate of a price
decline with a decrease in demand. A high ratio is
called inelastic demand. It certainly seems that oil fits
this definition. A similar statistic can be calculated for
supply. Since oil supply is something that can’t be
influenced greatly in the short run, and estimates over
economic growth and the worlds oil needs are
constantly changing, it only stands to reason that the
price of oil is very volatile – say those who believe that
the oil and commodity markets have been in
equilibrium all along.     

Return to Oil Manipulation - Part One


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_________________________________________
Is the Price of Oil Being Manipulated?
Why is the Price of Oil Going Up? Here
are some Logical Explanations. Part  
Two.
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