Realist, not conformist analysis of the latest financial, business and political news

Economics People, Seriously, Economics

Supergiant oil tankers are floating outside the world’s largest shipping ports with enough oil to meet the world’s daily demand twice over. Only months ago these vessels criss-crossed the globe laden with up to 2 million barrels. Today they stand motionless and bloated with crude that no one will buy.

If no one will buy this oil then why is there a market price for it? And why are there transactions occurring at this market price?

We can go further. This oil is owned by someone. That means someone has bought it.

It’s entirely true that some of this oil – say maturing futures at Cushing – has a negative price. But that’s just an annoying market price, not the absence of a market nor a lack of a price at which someone will buy it.

We can go to another level of explanation, which is that of course all this oil has been sold. Oil is, as we know, in contango. This means the price in the future is higher than the price now. So, buy at the now price, store on a ship, sell in that future. And people don’t do this naked. They buy physical now and sell the future now at that higher price for delivery in that future.

That is, all that oil is being traded – bought – on those futures markets. There are tens of thousands of such transactions a day – tens of thousands of people entirely willing to buy that oil. In fact, they already have.

Finally we can go to the proper level of explanation. Which is that this is the market price. So, therefore, there are buyers. For the market price is the price at which the market clears, at which there are buyers for exactly as much of whatever there are sellers. That’s what the market price means.

Sure, we might not like that price. For example, there’s a little boy in the world for every girl, a girl for every boy. And given the farting horrors that some birds end up shagging that market clearing price is horrible for at least some. Yet it is, still, the market clearing price for the definition is the price at which the market clears – where every willing seller has found a willing buyer.

The statement “no one will buy” is to grossly, horrendously, misunderstand what a market is. But then this is The Observer so who’s surprised, eh?

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Boganboy
Boganboy
11 months ago

Since Oz has to import oil, I’m pleased to see there’s plenty available despite the panic—-oops pandemic.

John B
John B
11 months ago
Reply to  Boganboy

Panicdemic.

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