[1] In our first installment of Misunderstanding Oil and Alternative Energy [2] we described the card game that oil futures traders can play to constrict supply and boost futures prices. As the futures market controls the spot market oil traders game theory plays make spot settlement more expensive and, therefore, drive up prices for all oil-based products.
Of course we also pointed out the down-side to this as increased volatility, the spikes up go higher as supply tightens (peak oil), but the downsides can be steep as demand disappears. The card game example is fully described by Brandenburger and Nalebuff in Coopetition [3].
Know When to Hold ‘Em
To prove the game theory thesis of oil trading, big oil is planning a return to the card table, so to speak. This article appeared in Forbes today [4](h/t Naked Capitalism [5]):
Oil companies plan to store millions of barrels of crude at sea as they wait for demand to pick up and prices to rise.
So far oil companies have booked ships capable of holding up to 10 million barrels, brokers have said, more than the daily output of top exporter Saudi Arabia [6].
My guess is they are readying for a price bottom (exactly what price is anyone’s guess). When that hits, get ready for some card ripping to get oil prices back up to good time levels.
. . . And that’s how it goes