[extropy-chat] Re: peak oil debate framed from a game theory standpoint ?

[Hal Finney]

Mike Linksvayer writes:
> I'm not sure I understand how deliveries are moved backwards and
> forwards and how this affects present day prices.  Put another way,
> if futures markets have a levelling effect on prices over time, I
> don't grok the mechanism.  Anyone have a brief explanation or pointer
> to a non-brief explanation?  My guess is that a change in future
> prices changes the expected return on holding on to current deliveries
> and selling at a later date, increasing or decreasing current supply
> if future prices are lower or higher than current prices respectively.

Econbrowser has an explanation of the effect at
http://www.econbrowser.com/archives/2005/06/contango_backwa_1.html which
may help.  Briefly, if prices for future delivery are much higher than
the present day, you could buy oil today on the spot market and store it,
locking in the future price by selling a futures contract.  That would
increase today's prices (by increasing demand) and moderate future prices
(by increasing selling pressure in the futures market).

In the other direction, if people thought the future value of a
commodity was going to be much less than today, purchasers would postpone
consumption and use temporary substitutes while waiting for prices to
go down.  Meanwhile there are always people who hold stores of oil to
deal with temporary changes in demand, and these would be drawn down
as well to protect against future price drops.  All these tend to drive
down prices in the present.

The first effect is stronger and is more relevant for evaluating the
Peak Oil scenario.  As described in this and the other Econbrowser
postings I pointed to, an expectation of future high prices would drive
up today's prices.  And that's exactly what you would hope to happen,
as it would cushion the impact of a future shortage, get people to start
conserving ahead of time, and encourage investment in alternatives.

The bottom line is that for a storable commodity like oil, price is not
just a function of present-day supply and demand.  Rather, the market
extrapolates future supply and demand, and those effects show up in
present day prices.  It's a clever system, and the fact that it happens
automatically is always amazing to me.

Hal