Too too contango

The image is lifted from The Oil Drum and shows the progress of oil futures prices over the past couple of months. Normally, future prices are lower than present prices, because of discounting. Discounting amounts to an expectation that you can invest money somewhere else now and buy the commodity at a lower net price because of your profits. So when the curve goes the other way, it’s unusual. According to the site (this is all news to me) this sort of reversal in futures is a prediction of a shortage and is called a “contango”.

This week is apparently the first time ever that all future dates are in contango. There is an expectation of rising prices built into the market even with discounting.

Of course, there’s some sort of tie-in between discounting and the growth imperative, so at some point the whole idea of futures pricing gets a little dicey if you enter a regime where what economists call “growth” is not the normal or long-term condition.

That’s all interesting enough, if a little aside the point of the obsessions of this blog. But there’s this comment from “westexas”:

My 2ยข worth:

In my opinion, we are looking at an accelerating net oil export decline rate, combined with a requirement for an accelerating rate of increase in oil prices, in order to balance supply & demand, as forced energy conservation moves up the food chain.

Let’s take all consumers in all oil importing countries and break them into five groups, and then rank them by income. So, at the bottom of the bottom quintile, we have a poor Third World consumer. At the top of the top quintile, we have Bill Gates. As we go up the income ladder, the cumulative purchasing power vastly increases, which as noted, IMO, suggests a requirement for an accelerating rate of increase in oil prices in order to balance supply & demand.

I think that these two factors will interact–and are interacting–to produce the following oil price trend: $50, $100, $200, $400, $800 . . .

Yeah. This is related to what I am saying about the effectiveness of prices in regulating behavior. We have a world where the distinction between the richest and the poorest is vast. The rich use the vast majority of the resources, and are very price insensitive compared to the poor.

I continue to search for something resembling a decent loaf of bread in Texas, the sort that any average boulangerie in Montreal will sell without a second thought (or a word spoken, but that’s Montreal for you). I don’t know what bread sells for in Montreal these days, but the closest equivalents (usually either too sour and pasty or too grainy and leaden, grumble) sell for almost $4.00 per loaf at Whole Foods or Central Market. (sigh)

Anyway, the cost of the wheat in that bread was what, like two cents. If it doubles to four cents it will not materially affect my decision whether to buy a loaf of somewhat disappointing bread or simply accept the wonderful tortillas on offer and eat tacos instead of sandwiches.

Enough whining. My nostalgia for a decent sandwich is something I can go on endlessly about, but somewhere in the world the difference between two cents and four is making a real impact on the budget of a desperately poor family. Their necessity is impacted long before my discretionary decision is influenced at all.

Similarly, people who can afford Hummers are not the people who care about $4 gas or even, in a lot of cases, $12 gas. I won’t say they dominate fuel usage (there are freight trucks to consider) but they are a major player. High prices don’t change their behavior much.

Families on a tight budget, meanwhile, often have long commutes and their lives are dramatically impacted by these changes.

Putting a price on carbon gives the most wasteful users a pass. When relatively few people were wealthy, when commodities were labor-limited rather than supply-limited, this sort of thing didn’t matter. In the new order, newly-many wealthy people and still-many poor people are bidding on very different uses of the same resources (grain, fuel) that are changing from demand-limited to supply-limited.

I don’t know if anyone saw this particular train wreck coming, but here it is. Commodities rule but prices aren’t effective in reducing demand. This seems madly inflationary to me. It’s also immensely destabilizing since it essentially makes the poor bear the burden of the adjustment, more or less on the grounds that if they wanted that flour badly enough they’d have been willing to bid a dollar on it.