My first hunch is that all scarcity is socially construed. Physical scarcity is
sort of Malthusian and although due consideration must be given to the subject,
it does not have the final call.
I take a Robert Mabro position on this, strictly speaking oil has been
financialised.
A friend did the below illustration using Hotteling rule.
Table 2: interest rate, oil price expectation, and behavior of producers and
speculators
Case I: Low interest rate and high expected future oil prices Case II: High
interest rate and high expected future oil prices
Producer: reduce production
Speculator:easy leverage to take long positions.
Producer: ambiguous – but high cost of exploration and development investment
Speculator:difficult to be leveraged
Case IV: Low interest rate and low expected future oil prices Case III: High
interest rate and low expected future oil prices
Producer:ambiguous – but low cost of exploration and development investment
Speculator:ambiguous Producer:increase production
Speculator:may take short positions.
Table 2 shows the summary of the behavior of producer, according to the
Hotelling rule, and the financial speculators. It shows possible two extreme
cases. One is the case with low interest rate and high expected future oil
prices (Case I). In this case, the oil producers have an incentive to reduce
the output while the speculator could easily take their position to create
fictitious demand. The amplification of fictitious scarcity may create an
additional expectation for future price growth, which may create an additional
incentive for oil producers to reduce the output. The acceleration of this
process may be stopped by an event such as a hike of interest rate where the
producer’s discounted value of oil wealth can be changed and/or where the
speculators’ leverage is dissolved by funding difficulties. Another extreme
case is with high interest rate and low expected future oil prices (CaseIII).
In this case, there is an incentive for oil
producers to increase the output while the speculator cannot take leveraged
long positions – they may rather take short-positions by short selling. The
direction of the acceleration of the process can be exactly opposite to Case
I. In this case, the process may only be stopped by an event such as a plunge
of interest rate.
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