Bleeding money at American Airlines

I have pointed this out on other threads. For everyone locking oil in at an unrealistic low price as a hedge, there is someone being the yang to the ying in that that trade who made a bad bet. And sets the market price for oil. And in this environment, in which oil is close to $130 a barrel, with estimates that it will reach $150 soon and $200 in the medium to longer term, there is simply no opportunity to hedge in a fairly low price. Someone might have gotten lucky with a prescient bet somewhere along the line -- and hedging does benefit people like airlines, who without a futures market would be at the entire whim of market forces and you'd see great price fluctuations and hundreds of industries going under every time there was a short-term oil shock.

But the self-fulfilling talk is not quite true. It is a chicken and the egg and the chicken clearly came before the egg. People see the supply and demand factors and the uncertain geopolitical atmosphere (the chicken) and those forces are driving the price of oil up. When supply is limited and demand is increasing, prices of ANY commodity go up. The fact that the future markets reflect this, and look at economic factors to predict that the price is going to further increase -- which is why money is flowing that way -- is the egg. But the chicken clearly came before the egg and in this case, and brought about the egg.

The only caveat is if investors, or speculators, are forming a bubble through some sort of irrational exuberance, which can drive the price up beyond what the market would dictate based on supply and demand factors. Such bubbles are never sustainable, though, because they are out of whack with market forces and an invisible hand always brings prices back to where they should be based on supply and demand factors. And the bubble pops. There may be an element of that right now, making oil more expensive than it should be in the short term, but that would be a phenomenon that will correct itself. People will eventually take their losses on bad investments when the markets correct themselves and the prices will find an equilibrium -- just as they always do; just as they did during the tech and Internet booms in the late 90s and early 2000s.