On 8/24/06, Jim Devine <[EMAIL PROTECTED]> wrote:
But why? Even if it will cost more to produce gasoline in the future,
gasoline being sold today was made with cheaper oil. This must be a
rip-off, right?
Actually, no. The reason behind the quick price change is a phenomenon
known as storage arbitrage.
The funny thing about this argument is that it assumes the *existence* and availability of such "storage facilities". Do such facilities actually exist? Or are they assumed into existence by application of neo-classical theoretical magic? A moments reflection suggests that such storage arbitrage ought to be very expensive (physical fuel-dump infrastructure, transportation, insurance).
Much more likely the producers are simply leaving the oil in the ground i.e. decreasing current production to artificially equalize the spot prices and the futures prices. By the vigorous application of the idiotic arbitrage argument in practice, the volatile futures prices are validated as a self-fulfilling prophesy.
Next wait for Exxon CEO to complain about "lack of spare capacity" and "supply and demand" forces. What a cruel joke this all is?
-raghu.
