On 8/24/06, Doug Henwood <[EMAIL PROTECTED]> wrote:
On Aug 24, 2006, at 3:10 PM, raghu wrote:
> The funny thing about this argument is that it assumes the
> *existence* and availability of such "storage facilities".
The EIA releases those numbers for the US every week <http://
tonto.eia.doe.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm>. There are
over 1.7 billion barrels of crude & products in inventory. The
markets take these weekly releases seriously. So it's not magical
neoclassical assumptions.
I beg to disagree. The DOE link you pointed to does provide statistics on crude and gasoline stocks. What it does NOT provide is some indication of the costs of storage. Also how much of this storage belongs to the Strategic Petroleum Reserve (which presumably is not available for arbitrage purposes).
The arbitrage argument outlined so elegantly by the NYT assumes away any such pesky costs. And that such arbitrage can be implemented instantaneously. This is indeed "neo-classical magic".
You claim that "The
markets take these weekly releases seriously." Your faith in the wisdom of the financial markets is touching, but can you elaborate how one can make sense of the recent oil price movements using this data? The futures price (the benchmark 1 month delivery contract) jumped after BP announced its Prudhoe closure on anticipation of shortages in the future but why did the spot price move so rapidly? The type of "storage arbitrage" implied by the NYT surely requires some time to implement, even if it is costless? So the oil firms acted preemptively to eliminate the supposed arbitrage opportunity by raising the spot price immediately?
In other words it was not actually necessary to implement the arbitrage but only necessary that a consensus existed among all the participants that such arbitrage was possible. A consensus that would lead to convergence between spot and futures prices in a case of self-fulfilling prophesies. Of course if as the NYT article says, the consensus now believes that "storage units are close to capacity" the market presumably would move in response to that consensus. But all these moves are based on belief not actual physical arbitrage. Which is what I meant by neo-classical magic.
It is one thing for individual businesses (e.g. airlines) maintaining petroleum stocks and quite something else for hedge funds to rapidly move inventory around to achieve lightning speed arbitrage - which is what the NYT theory requires. I am sorry if this offends you but I find such deceptive "reasoning" utterly contemptible.
-raghu.
