Last year about this time I made a bet that the price of oil will fall around autumn, after the driving season. I studied all about the world oil market, and read hundreds of opinions, and of course, I lost all my money. I found that in this field of oil and macroeconomics, Econobrowser is the most serious site, and although I am an old man, am not ashamed of calling Prof. James Hamilton my personal teacher. If the kind reader has followed my tortured nights trying to understand the workings of oil, knows that I always found arguments and reasons for higher and lower prices, and could never reach a firm conclusion. On anything. So when Prof. Hamilton writes
Is the price of oil today too high given the fundamentals? Could be. Is it too low? Could be. But one thing I'm sure that's too high is the confidence on the part of those who insist they know the answer.a warm feeling of vindication works its way up along my old bones and fat tissues, and am happy to have found a twin spirit in the universe. I would not be surprised if Prof. James Hamilton is revealed as a fellow Hungarian Jew (I am joking, of course).
2 comments:
I learned 30 years ago that the markets follow a "random walk" the same as the Brownian motion of molecules, so that all those who see "trend lines" in the markets are following illusions and attempting (as is the universal human impulse) to impose order and reason even where no order and reason exists.
BUT at the same time, while predicting the markets is in the end an impossible task, the only reason the markets are (somewhat) efficient is that millions are engaged in the (mostly) futile labor of attempting to predict them. It is a human paradox like religion - even though we know we will never find God (or the perfect system for predicting the markets) in this lifetime, we keep praying to find Him (or it) anyway.
The only trend that you can predict with accuracy is that the markets will NOT behave in a linear (or even predictably cyclical) fashion. If oil has risen $40 a barrel in the last year, this tells you nothing about whether oil will rise another $40 (or for that matter, fall another $40) in this year. Every commodity bubble inflates and inflates until one day the market gives the invisible "basta" signal and the bubble is pricked.
The nature of the commodities markets do not allow us to invest in a long enough time horizon - futures contracts run only a few months. The shorter the time lens, the more random the market is. However, over the long run (although Keynes said that in the long run, we are all dead) oil is clearly a commodity that has become and will become scarcer and scarcer (barring some technological development that obsoletes it, which does not appear to be on the horizon) so it would be a (less) foolish bet to invest in a company that owns in ground oil resources the next time some short term wave sends the price of oil (and such producer's stock) lower.
Speaking of technological developments, I do believe that these put some cap on the price of oil. As long as Saudi Arabia was able to pull all the oil that the world needed out of the ground at $2/barrel, it did not pay to invest in alternatives. Even now, investing in alternatives is chancy - if you are building a trash to oil facility at a break even price of $140/barrel, that facility was a profitable facility last week but this week it isn't already.
But still, in (again, the long run) technology makes it hard to predict the future. Yesterday I was traveling on a highway thru an uninhabited area where around 20 years ago the government spent millions to install a then state of the art call box system. If your car broke down, there was, at every mile post, an emergency telephone (wireless and solar powered so that cables did not have to be run) that you could use to summon help. You were never more than a 1 kilometer walk from such a phone. This investment, which seemed wise and advanced at the time, has proven to be totally worthless. Today everyone and his brother carries a cell phone so these boxes go completely unused - I'm sure it's only a matter of time before they are abandoned entirely.
I should add of course you are right - the so called "James Hamilton" was born "Hirsch Jakob" and is an emmese Ungarische Yid who has cleverly hidden behind a Christian name. But there is no hiding from us.
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