Publications: Notes at the Margin

The Cause of the Recent Price Swing... (March 29, 2021)


In 2007, hedge fund manager Michael Masters received much attention for asserting that oil price fluctuations that took crude from $30 to $130 around that time could be attributed to speculation and hot money. Academics later published papers disproving his claim. The recent price volatility has provided an opportunity to test Masters’ hypothesis with more granular CFTC and ICE data. Last week’s price shifts show that these movements can be linked to changes in money manager positions and the offsetting changes in spread trader positions.


Recent market developments suggest that the money managers encouraged by Goldman Sachs’ Jeffrey Currie and other advocates of another commodity supercycle might not be winning many converts. Oil-exporting countries may have scared off hot money by threatening to boost output. The first part of this report shows the connection between the supercycle hype and the price increases.


For our second topic, we note that the Bureau of Economic Analysis’s recent data provides further evidence of consumers moving away from motor fuels. The share of personal consumption expenditures on gasoline continues to decline after adjusting for price changes. At the beginning of the century, consumers would have spent almost three percent of their income on gas at current prices. In 2021, that share at today’s prices has declined by nearly half. While gasoline prices have not become “unimportant to consumers,” they are now far less critical. In other words, the threat of high gasoline prices no longer concerns most Americans.


Electric vehicles are the final topic. Many believe that EV market penetration will be slow. They may be correct. However, the speed of adoption might depend on how many recharging stations are available. Historical support for this statement may lie in the effect of the total miles of interstate highway completed on intercity passenger train travel. Our analysis suggests a quick decline for diesel and gasoline-powered (internal combustion or IC) vehicles.


Auto manufacturers desiring to sell more EVs may accelerate the decrease in IC vehicle use by following John Deere’s approach. Deere licenses the software needed to service its agricultural equipment. If auto firms did the same, they could accelerate the scrappage of computer-dependent twenty-first-century models, leaving the US and other OECD countries with a combination of new EVs and older, less-sophisticated IC vehicles like those in Havana, Cuba.


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