[tt] the physics arXiv blog

Tue Aug 19 11:15:53 UTC 2008

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From: the physics arXiv blog <howdy at arxivblog.com>
Date: Tue, 10 Jun 2008 13:17:47 -0500 (CDT)
To: eugen at leitl.org
Subject: the physics arXiv blog
Reply-To: the physics arXiv blog <howdy at arxivblog.com>

[1]the physics arXiv blog

   [2]Oil prices: a classic bubble economy?

   Posted: 10 Jun 2008 12:03 AM CDT

   [3]Oil bubble 

   The price of oil has quadrupled since 2003. If this dramatic rise were
   the result of speculation in a bubble economy and not the normal
   forces of supply and demand, how would you go about proving it?

   Try using some well known concepts from statistical physics and
   complexity theory, says [4]our old friend Didier Sornette at the Swiss
   Federal Institute of Technology in Zurich.

   For economists, the term bubble refers to a situation in which
   excessive expectations of future price increases cause prices to rise
   above what can justified by a fundamental valuation.

   One of the signatures of such a bubble is a faster-than-exponential
   growth in prices, something that has been seen in several recent
   bubbles such as the dotcom boom that busted in 2000, the US house
   price surge that peaked in 2006 and the sub-prime market which
   collapsed in 2007.

   What creates faster than exponential growth? One possibility is
   positive feedback mechanisms which reinforce unsustainable prices
   rises.

   So Sornette's analysis involves identifying the signature of
   faster-than-exponential growth, which is relatively easy to spot, and
   then identifying the positive feedback mechanisms that may have caused
   it. These, he says, are:

     (1) Protective hedging against future oil price increases and a
     weakening dollar whose anticipations amplify hedging in a positive
     self-reinforcing loop 

     (2) Search for a new high return investment, following the collapse
     of real-estate, the securitization disaster and poor yields of
     equities, whose expectations endorsed by a growing pool of hedge,
     pension and sovereign funds will transform it in a selffulfilling
     prophecy; 

     (3) The recent development since 2006 of deregulated oil future
     trading, allowing spot oil price to be actually more and more
     determined by speculative
     future markets and thus more and more decoupled from genuine
     supply-demand equilibrium.

   Sornette says this "provides evidence that the recent oil price run-up
   has been amplified by speculative behavior of the type found during a
   bubble-like expansion."

   He may well be right but he fails to nail the argument in this paper.

   There is another way in which faster-than-exponential price rises can
   occur and that's from a faster-than-exponential rise in demand. What
   Sornette fails to show is that the recent price rises cannot be
   explained by a faster-than-exponential rise in demand from economies
   such as China and India.

   That's not beyond the realms of possibility but Sornette seems to
   ignore it. (Of course, the Chinese and Indian economies may be part of
   their own larger bubble but that's another issue).

   Sornette says oil price rises may be the result of speculation. Then
   again, they may not.

   Ref: [5]arxiv.org/abs/0806.1170: The 2006-2008 Oil Bubble and Beyond

   [6][arXivblog?i=czdRjL] 
   [7][arXivblog?i=Qg0giI] [8][arXivblog?i=iZvvuI]
   [9][arXivblog?i=qC4Dii] [10][arXivblog?i=0B0NzI]
   [11][arXivblog?i=SWV3Zi] [12][arXivblog?i=WkbCSI]
   [13][arXivblog?i=WLfAKi] [14][arXivblog?i=HkqNCI] 
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References

   1. http://arxivblog.com/
   2. http://feeds.feedburner.com/~r/arXivblog/~3/308561621/
   3. http://arxivblog.com/wp-content/uploads/2008/06/oil-bubble.jpg
   4. http://arxivblog.com/?p=92
   5. http://arxiv.org/abs/0806.1170
   6. http://feeds.feedburner.com/~a/arXivblog?a=czdRjL
   7. http://feeds.feedburner.com/~f/arXivblog?a=Qg0giI
   8. http://feeds.feedburner.com/~f/arXivblog?a=iZvvuI
   9. http://feeds.feedburner.com/~f/arXivblog?a=qC4Dii
  10. http://feeds.feedburner.com/~f/arXivblog?a=0B0NzI
  11. http://feeds.feedburner.com/~f/arXivblog?a=SWV3Zi
  12. http://feeds.feedburner.com/~f/arXivblog?a=WkbCSI
  13. http://feeds.feedburner.com/~f/arXivblog?a=WLfAKi
  14. http://feeds.feedburner.com/~f/arXivblog?a=HkqNCI
  15. http://arxivblog.com/
  16. http://www.feedburner.com/fb/a/emailunsub?id=8632699&key=kesJ612ZsV
  17. http://feeds.feedburner.com/arXivblog
  18. http://feeds.feedburner.com/arXivblog

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Eugen* Leitl <a href="http://leitl.org">leitl</a> http://leitl.org
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