Jul 22 2008

I’m Speculating About The Speculation About Oil

Having just finished reading George Soros’s latest book The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means my brain is now full of his theories around reflexivity.  I have always instinctively agreed with Soros’s philosophy even though I find it incredibly difficult and chewy to work my way through (but that’s true of all philosophy for me.)

I’m a great fan of the Heisenberg Uncertainty Principle which, according to my friend Wikipedia, "is the statement that locating a particle in a small region of space makes the velocity of the particle uncertain; and conversely, that measuring the velocity of a particle precisely makes the position uncertain."  Wikipedia suggests that this is often conflated with the Observer Effect (when you observe a phenomenon, you change it), but I think the intersection of the Heisenberg Uncertainty Principle and Soros’s Theory of Reflexivity reduce nicely in my brain to the Observer Effect. 

That leads me to the real point of this post, which is the great short article in the New Yorker by James Surowiecki titled Oily Speculations (thanks Amy.)  In the last month a new class of villain has emerged in the rapidly escalating price of oil – the "speculator."  Surowiecki calls bullshit on this (not on the involvement of the speculator, but why this is both irrelevant and why the speculator is not the villain.)

The key sentence in the article is "Speculation has been a favorite target of politicians looking to mollify anxious voters since the time of ancient Greece, when the orator Lysias protested that wheat traders had reduced Athens to a state of siege.” 

The conclusion, which Surowiecki bashes us (appropriately) over the head with is "The difficulty for Congress, of course, is that none of the problems that have driven up the price of oil lend themselves to a quick fix, and most, like the boom in global demand and the inaccessibility of certain oil fields, aren’t under our control at all. That’s what makes speculators a perfect target: by going after them, Congress can demonstrate to voters that it understands their pain, and at the same time avoid doing anything that might require real sacrifice from Americans. Our dependence on foreign oil, together with the fiscal fecklessness that has helped reduce the value of the dollar, means that there is no easy way out of where we are. But in an election year that’s hardly a message that anyone in Washington is going to deliver."

If you net it all out, it’s the Observer Effect writ large.