Edited by Joanne Evans and Lester C. Hunt
Chapter 18: The Behaviour of Petroleum Markets: Fundamentals and Psychologicals in Price Discovery and Formation
The behavior of petroleum markets: fundamentals and psychologicals in price discovery and formation Dalton Garis Nature obeys laws that operate independently of whether they are understood or not; the only way man can bend nature to his will is by understanding and applying these laws. That is why alchemy failed and natural science reigns supreme. But social phenomena are different: they have thinking participants. Events do not obey laws that operate independently of what anybody thinks. On the contrary, the participants’ thinking is an integral part of the subject matter. This creates an opening for alchemy that was absent in the sphere of natural science. Operational success can be achieved without attaining scientific knowledge. By the same token, [the] scientific method is rendered just as ineffectual in dealing with social events as alchemy was in altering the character of natural sciences. (Soros, 2003, p. 311) 1 Introduction Soros (2003) captures the difficulty of modeling the behavior of markets including commodity futures markets such as oil, gas and petroleum products. These energy futures markets are more complex as they are the obligation to buy or sell some amount of the good at a previously specified price within a specified time period. More behavioral complexity is created by the use of equity markets, including hedge funds. The result has been price runs leading to increased irrationality of petroleum markets. Market instability is set to continue as petroleum markets have undergone a fundamental change, limiting some of the usefulness and applicability of...
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