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May 20, 2004
Backwardation of oil prices
Don't miss Arnold Kling's analysis over at EconLog regarding the phenomenom known as backwardation energy prices. Arnold explains backwardation by using the example of current and future prices of oil:
As of May 20th, the June 2004 futures contract for light crude oil was at $41.66, while the June 2005 futures contract was at $35.58. When futures prices are below spot prices, this is known as "backwardation." I believe that it represents a puzzle. Think of it this way. If you have oil, by holding onto it for a year, you are losing 15 percent. That seems kinda dumb.
Arnold goes on to explain that the various theories on why backwardation occurs all seem to be somewhat flawed, but then makes this observation and asks this very salient question:
Speculators buy low and sell high. The American and Saudi governments do the reverse. Which is the stabilizing force in the oil market?
Posted by Tom at May 20, 2004 1:00 PM
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