--- Michael Pollak <mpollak at panix.com> wrote:
> On this model, you could theoretically have exactly
> the same volume of
> supply and demand in the future, but traded at a
> much higher price,
> because if all of it was locked in at high prices
> and taken off the freely
> tradeable market, there would be negligible cheaper
> supply freely
> available.
>
> I freely concede that in the real world, if there
> aren't solid production
> constraints, the high price should stimulate higher
> production above and
[WS:] But would it not also be the case that if there were solid production constraints - in relation to the future demand - locking future prices would be a very rational behavior that would stablise the market, at least for a while?
So if oil is "peaking out" as some argue, the price will only go up, and th eonly question is how fast? In that situation, fixing future prices is a rational strategy of buying some time and dampening the shock caused by price hikes.
A somewhat analogous situation existed in the early stages of state socialist development in E. Europe. Rapid industrialization created demand for labor and caused large migration from labor-intensive agriculture to industry. As a result, demand for food sold on the market (rather than that produced for own consumption) increased, whereas supply of food remained stangnant (due to technological limiations of the labor intensive ag sector.)
In that situation, the central planning authorities made the only rational decision - they administratively fixed the prices to prevent price hikes in the future. This basically set in motion the same mechanism as future delivery contracts at currently set prices that you discuss.
As I said, it was a rational and good decision (I think), because food is a basic necessity, and any dramtic increase of its price would lead to undesirable social consequences. Price fixing avoided that, and allowed the industrialization project to proceed without major disruptions, until it allowed suffcient mechanization of the ag sector and subsequent increase in food production.
By the same logic, fixing oil prices - even under "peak oil" condition, makes sense, becaouse it buys time and allows more smooth transition to alternative energy sources, no?
Wojtek