Wishful thinking at the Economist

In 1990, the former Wall Street trader Jim Rogers (interviewed here by Jonathan Davis, 15 March) set off to circumscribe the globe astride a large motorcycle. He returned in 1992 having pondered the meaning of life — and the answer was ‘commodities’. As a player of markets, he did not have to do anything so practical as to go out and drill or mine. He just kept buying more commodity futures — a gigantic bet that commodity prices would rise. He was right, and became hugely wealthier as a result.

But as the price of oil, the world’s most essential commodity, continues to rise, listen for the sound of market ideologies creaking under a weight they cannot bear: for example, in the Economist’s editorial last week. ‘Speculators do not own real oil…[They] may raise the price of “paper barrels”, but not of the black stuff …inventories are not especially full just now and there are few signs of hoarding.’

Jim Rogers and his imitators are off the hook, it implies, and the problem is with the fundamentals of supply. But why can’t the Economist shake its faith in functioning markets? How can it be so wrong about speculation in oil?

Ten years of housing bubble have taught us that when prices are expected to rise, everyone selling wants to wait and everyone buying wants to rush. So houses become scarce in the market, and a belief that prices will rise makes them go on rising. When the Economist claims it sees no signs of hoarding, it is asking, ‘Where, for oil, is the equivalent of Aunt Gladys, waiting for the very last moment to sell the family house?’

First, look at Saudi Arabia. Between 2007 and 2009, it had planned to bring on two new fields, Khursaniyah and Shaybah, adding almost half a per cent to world production capacity — the equivalent of the whole of China’s oil-demand growth for 2008.