石油的危险价格

By George Soros

The following is adapted from testimony given by George Soros before the US Senate Commerce Committee Oversight Hearing on June 3, 2008.

In January 2007, the price of oil was less than $60 per barrel. By the spring of 2008, the price had crossed $100 for the first time, and by mid-July, it rose further to a record $147. At the end of August it remains over $115, a 90 percent increase in just eighteen months. The price of gasoline at the pump has risen commensurately from an average of $2.50 to around $4 a gallon during this period. Transportation and manufacturing costs have risen sharply as well. All this has occurred at the same time as a world credit crisis that started with the collapse of the US housing bubble. The rising cost of oil, coming on top of the credit crisis, has slowed the world economy and reinforced the prospect of a recession in the US.

The public is asking for an answer to two questions. The principal question is whether the sharp oil price increase is a speculative bubble or simply reflects fundamental factors such as rapidly rising demand from developing nations and an increasingly limited supply, caused by the dwindling availability of easily extractable oil reserves. The second question is related to the first. If the oil price increase is at least partly a result of speculation, what kind of regulation will best mitigate the harmful consequences of this increase and avoid excessive price fluctuations in the future?

While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor. My theory of investment bubbles, explained more fully in my recent book, The New Paradigm for Financial Markets, is considerably different from the conventional view. According to my theory, prices in financial markets do not necessarily tend toward equilibrium. They do not just passively reflect the fundamental conditions of demand and supply; there are several ways by which market prices affect the fundamentals they are supposed to reflect. There is a two-way, reflexive interplay between biased market perceptions and the fundamentals, and that interplay can carry markets far from equilibrium. Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market’s interpretation of reality becomes too wide to be sustainable.

The misconception is increasingly recognized as such, disillusionment sets in, and the change in perceptions begins to influence the fundamental conditions in the opposite direction. Eventually the trend in market prices is reversed. As prices fall, the value of the collateral used as security for loans declines as well, provoking margin calls. Holders of securities must sell them at distressed prices to meet the minimum cash or capital requirements, and such selling often causes the market to overshoot in the opposite direction. The bust tends to be shorter and sharper than the boom that preceded it.

This sequence contradicts the conventional view, which holds that markets tend toward equilibrium and deviations from the equilibrium occur in a random manner. The widely used synthetic financial instruments like collateralized debt obligations (CDOs), which have played such an important part in turning the subprime mortgage crisis into a much larger financial crisis, have been based on that view.

In fact, financial institutions, rating agencies, and regulatory authorities failed to take into account the possibility of initially self-reinforcing but eventually self-defeating sequences of boom and bust. They built their calculations of risk on the wrong premises. When the subprime bubble burst, AAA-rated CDOs and other synthetic instruments suddenly lost a large part of their value. The subprime crisis spread to other markets with alarming rapidity and the solvency of the most creditworthy financial institutions was suddenly thrown into doubt.

We are currently experiencing the bursting of a credit bubble that has involved the entire financial system and, at the same time, a rise and eventual fall in the price of oil and other commodities that have had some of the characteristics of a bubble. I believe the two phenomena are connected in what I call a super-bubble that has evolved over the last quarter of a century. The fundamental trend in the super-bubble has been the ever-increasing use of leverage-borrowing money to finance consumption and investment-and the misconception about that trend was what I call market fundamentalism, the belief that markets assure the best allocation of resources.

So much for bubbles in general. With respect to the oil market in particular, I believe there are four major factors at play which mutually reinforce one another. Two of them are fundamental and the other two are “reflexive” in the sense that they describe tendencies in the market that themselves affect the supposedly fundamental conditions of supply and demand.

First, the cost of discovering and developing new reserves is increasing, and the depletion rate of aging oil fields is accelerating. This goes under the rather misleading name of “peak oil”-namely that we have approached or reached the maximum rate of world output. It is a misleading concept because higher prices make it economically feasible to develop more expensive sources of energy. But it contains an important element of truth: some of the most accessible and most prolific sources of oil in places like Saudi Arabia and Mexico were discovered forty or more years ago and their yield is now rapidly falling.

Second, there is a “reflexive” tendency for the supply of oil to fall as the price rises, reversing the normal shape of the supply curve. Typically, as the price of a product rises, producers will supply more. For oil producers who expect the oil price to rise further, however, there is less incentive to convert oil reserves underground into dollar reserves aboveground. Oil producers may calculate that they will be better off if they exploit their reserves more slowly. This has led to what may be described as a backward-sloping supply curve. In addition, the high price of oil has enabled political regimes that are both inefficient and hostile to the West to maintain themselves in power, notably Iran, Venezuela, and Russia. Oil production in these countries is declining.

Third, the countries with the fastest-growing demand-notably the major oil producers, together with China and other Asian exporters-keep domestic energy prices artificially low by providing subsidies. Therefore, rises in prices do not reduce demand as they would under normal conditions. This may be considered one of the fundamentals, although, under budgetary pressures, government policies are gradually changing.

Finally, demand is reinforced by speculation that tends to reinforce market trends.[*] This is a quintessentially reflexive phenomenon. In addition to hedge funds and individual speculators, institutional investors like pension funds and endowment funds have become heavily involved in commodity indexes, which include not only oil but also gold and other raw materials. Indeed, such institutional investors have become the “elephant in the room” in the futures market. Commodities have become an asset class for institutional investors and they are increasing their allocations to that asset class by following a strategy of investing in commodity indexes. In the spring and early summer of 2008, spot prices of oil and other commodities rose far above the marginal cost of production and far-out, forward contracts rose much faster than spot prices. Price charts have taken on the shape of a parabolic curve, which is characteristic of bubbles in the making.

So, is this a bubble? The answer is that there is a bubble superimposed on an upward trend in oil prices, a trend that has a strong foundation in reality. It is a fact that, absent a recession, demand is growing faster than the supply of available reserves, and this would persist even if speculation and commodity index buying were eliminated. In discussing the bubble element I shall focus on institutional buying of commodity indexes as an asset class because it fits so perfectly my theory about bubbles.

Commodity index buying is based on a misconception. Investing in commodity indexes is not a productive use of capital. When the idea started to be heavily promoted, around 2002, there was a rationale for it. Commodity futures were selling at discounts from cash, and institutions could pick up additional returns from this so-called “backwardation,” i.e., the amounts by which the spot price was higher than the futures price. Financial institutions were indirectly providing capital to commodity producers who sold their products forward-receiving a fixed price for commodities to be supplied at a future date-in order to secure financing for investment in additional production. That was a legitimate use of capital. But the field got crowded and that opportunity for profit disappeared. Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a price trend giving rise to a misconception and it is liable to be self-reinforcing in both directions.

I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance that led to the stock market crash of 1987. In both cases, institutional investors are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987, there would be a crash. Index buying and speculation that follows trends reinforce the prevailing direction of prices, and have had a destabilizing effect by aggravating the prospects of a recession. The effect will be reversed only when the recession begins to take hold and demand declines, but it would be desirable to rein in index buying and speculation while they are still inflating a bubble.

There is a strong prima facie case against institutional investors pursuing a strategy of investing in commodity indexes. It is intellectually unsound, potentially destabilizing, and distinctly harmful in its economic consequences. When it comes to taking any regulatory measures, however, the case is less clear. Regulations may have unintended adverse consequences. For instance, they may push investors further into unregulated markets such as trading shiploads of oil, which are less transparent and offer less protection.

Under the current law that regulates managers of pension investments-the Employee Retirement Investment Security Act (ERISA)-it may be possible to persuade institutional investors that they are violating the “prudent man’s rule” they are required by law to observe because they are “following the herd” just as they did in 1987. Fear of such a violation may lead them to adopt more sensible trading practices.

If this does not work, the government could disqualify commodities-as distinct from the equities of commodity-producing enterprises-as an asset class for financial institutions that are regulated by ERISA. These institutions are serviced by investment banks like Goldman Sachs and Morgan Stanley, which are currently exempt from limits on speculative positions. The trade in commodity indexes could be discouraged by imposing such limits, but to make it effective, limits would have to be imposed also on trading and on shiploads of oil.

Some are suggesting that margin requirements for commodity transactions should be raised. Margin rules determine how much in cash or Treasury bills must be deposited when buying or selling a contract. An increase in margin requirements would have no effect on the commodity index buying strategies of ERISA institutions because the transactions are in cash, not on credit. But such an increase could discourage speculation by investors other than financial institutions. Varying the margin requirements and minimum reserve requirements for loans by financial institutions are tools that ought to be used more actively, as market conditions warrant, in order to prevent asset bubbles from inflating further. That is one of the main lessons to be learned from the recent financial crisis.

In conclusion, it should be emphasized that curbing speculation in oil futures would be at best a temporary remedy. It could serve a useful purpose at a time when the parabolic rise in oil prices reinforces the prospects of a recession but it would not address the fundamental problems of peak oil, global warming, and dependence on politically unstable or hostile countries for our energy supplies. Those problems can be solved only by developing carbon-free sources of energy. The imminent onset of a recession, by reducing the demand for oil in the developed countries, is likely to bring some relief from higher oil prices, but that relief will be temporary. It should not divert our attention from the pressing need for developing alternative energy sources, and that will entail higher prices, at least in the early stages.

In the absence of alternative sources, the price of oil is liable to rise indefinitely. Only if we are willing to live with higher prices in order to develop alternative fuels can we hope to see an eventual reversal in the long-term uptrend in oil prices. In contrast to oil and other fossil fuels whose costs of production are bound to rise, the alternative fuels will become cheaper as we discover cheaper and more efficient technologies to exploit them, and will eventually bring down the price of fossil fuels as well.

-August 27, 2008