Today’s news that OPEC and the IEA are going to announce a “joint action plan” to combat oil price volatility (see Bloomberg) suggests that the efforts of these organisations may be misdirected. Not because we might like less volatility in the market but simply because the suggested approach is unlikely to work.
At the time of writing, we don’t know the details, but according to Bloomberg insiders say the accord involves “pooling expertise and sharing data to improve transparency.” In an interview on March 28 in Cancun Mexico, International Energy Forum Secretary General Noe van Hulst said, according to Bloomberg, “The better the market is informed about what happened in the past, what’s happening in the present and what will happen in the future, the less room there will be for …unfounded speculation and second-guessing,”
Well… no actually.
If you are talking about demand/supply data past and present, greater transparency, better speed of gathering the data, better accuracy simply tells you what’s happening now and in the recent past. How exactly will this improved data about the present tell you what will happen in future? However complex the model, however reasonable the assumptions about the future, world oil markets are far too complex to predict with any accuracy. And this has been demonstrated over and over for many years by all forecasters, including this one. You can forget the idea that more information about the present will allow you to make better predictions about the future. And even if you could, this additional information would little or nothing to reduce volatility. If speculators are behind the volatility (and the jury is still out on that one) then they would start speculating on the basis of this new, better, more transparent data!
If you look at consensus oil and gas price forecasts, they will generally take as a starting point the recent past and project something “reasonable” from that level. This is not so much a prediction as an assumption. Better data would provide more fodder for this reasonable approach.
There’s another thing that worries me about this “plan”. It assumes that you can do something about volatility without making radical changes to the system within which the volatility takes place.
OPEC attempts (with varying degrees of success) to control oil volumes. That’s the system. And under that system, prices will fluctuate widely simply because there is no way you can predict the volumes you need to produce to keep prices stable. If you really wanted stability in prices you would have to ask OPEC, or one of its members to set the price. For various reasons (which would take a long time to relate) this approach has not been adopted.
If volatility is just another name for risk then the proposed plan is really trying to reduce risk. But isn’t that precisely the kind of thinking (albeit on a narrower scale) that led, ultimately, to the financial meltdown of 2008?
Volatility may not be nice but it appears for a reason. A symptom rather than a cause. We might like to live in a world that is stable and predictable but we don’t. Perhaps our time would be better spent discussing ways of being prepared for volatility rather than trying to find ways of eliminating it.