One of the problems for economists is finding out what the actual market price was. If the spot price in July of 2008 averaged $125, but 80 percent of the oil that actually exchanged hands at that time fulfilled contracts at a much lower price, perhaps $60, maybe the actual average price was $75.

And the big problem for those of us who rely on market information is that we make business decisions based on prices.

Transparency is the absolute key. I am being patient with the Obama people when they promise transparency, but the last thing that Larry Summers' friends at GS want is transparency. Goldman Sachs was constantly predicting higher oil prices last summer, stampeding the herd, and then profiting from their own predictions. If everybody had the same information as GS, things would be much less volatile. A level playing field in the markets means that everyone has the same information, and the winners are those who analyze it the best.; How much of this is market "noise"? For instance, when oil was in that range of $110 bbl to $147 for a couple months, how many barrels actually exchanged hands in that price range? Did the typical refiner lock in his September supply at $70 much earlier in the runup?

One of the problems for economists is finding out what the actual market price was. If the spot price in July of 2008 averaged $125, but 80 percent of the oil that actually exchanged hands at that time fulfilled contracts at a much lower price, perhaps $60, maybe the actual average price was $75.

And the big problem for those of us who rely on market information is that we make business decisions based on prices.

Transparency is the absolute key. I am being patient with the Obama people when they promise transparency, but the last thing that Larry Summers' friends at GS want is transparency. Goldman Sachs was constantly predicting higher oil prices last summer, stampeding the herd, and then profiting from their own predictions. If everybody had the same information as GS, things would be much less volatile. A level playing field in the markets means that everyone has the same information, and the winners are those who analyze it the best.;;

The Kamen interview seems like a strange deployment of the “tech fix” argument. One of the reasons why healthcare is so expensive in this country is that we are the first adopters of new technology, and, more importantly, that actors in the system are incentivized to call on those procedures and drugs independently of their necessity or outcomes.

The difference is not about scarcity, but rather the way the market is structured. In a Kamenian world, our outcomes would be better than anyone else’s, since we have invested the most in technology, but they’re not, so something else must be at work.

As for technology, I like telling people that the best way to fight climate change is to build 10,000 nuclear reactors and spend the next 30 years developing a space elevator to shoot all that toxic waste into space. Now that would be a proper tech fix.

Many of the futures are cash settled contracts where neither buyer nor seller has any right to physical delivery if his position remains outstanding on contract expiry: these contracts allow Exchange for Physical (and also exchange for swap) agreements to be registered, where two parties to a trade that has already been entered into agree to transmute it into a futures transaction, either entirely, or at least with regard to price risk as part of more complex pricing arrangements. EFP and EFS transactions are often motivated by credit risk, since the exchange clearing houses ensure that all futures positions are supported by margin payments to cover actual and potential losses from day to day via mark to market and initial margins. Only the net position is margined, which is more financially efficient and less risky than each entity trying to ensure adequate collateral from all its counterparties and having to provide collateral to them as well.

ICE Gas Oil, and NYMEX Crude, Heating Oil and Gasoline are contracts with real physical delivery, although the volumes that go to actual delivery via the futures contracts are usually small (e.g. 10-15m bbl of crude against NYMEX WTI): most trades are offset with other trades prior to contract expiry. The main reason for this is that the actual contracts only make best sense for a very few producers, refiners or product wholesalers who happen to be ideally located to make or take delivery.

In addition to the futures contracts there are many swap contracts: many of them cover some element of basis risk – e.g. the difference between jet fuel and gas oil prices, or between different kinds of crude oil, or between futures prices and some physical pricing basis. There are also huge volumes of fixed for floating swaps which is essentially what index funds are.

Almost the whole point is that the buyer identifies a need for, say, a few thousand barrels a year hence, the seller writes contracts for that number, then the buyer simply holds that contract for the year. They are of course free to trade that position if they think they can get a better deal, or if they need to increase or reduce their consumption.

The volume of trading should actually be very, very low. On Friday, ICE’s trading of Brent Crude futures was 354,982 for monthly contracts and 262,520 for WTI, on an Open Interest in each case of less than twice that. Trading on UK Natural Gas was 4,265 while Open Interest was 95,669, only about 5% volume. UKNG is NOT an indexed commodity. Unsurprisingly the price trend has been DOWN for the last six months. OK, it’s summer, but last year prices went UP in summer.

It’s clear that the actual volumes of consumption are way, way more than the futures markets. OI of 662,000 barrels is only a little over a third of the UK’s 1,763,000 barrels of oil consumed PER DAY (CIA World Factbook 2007 estimate). Even if the OI is counted in the minimum purchase of 100 barrels (not clear), it’s still only 37 days’ worth of one country’s consumption.

There’s an argument that the problem is that real physical hedgers aren’t participating fully in the market. As such they are easily outweighed by speculators. Should everyone hedge their own petrol consumption? In my case just one contract is about 30 times my annual consumption of petrol! The small cartel of oil producers and refiners has no real interest in keeping prices down as it’s acting as both seller AND buyer – the motorist’s only bargaining tactic is to find the lowest-priced filling station in the area.

Data from https://www.theice.com/marketdata/reportcenter/reports.htm.