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March 26, 2005

Economic Idiot Award.

A new award is announced today by this blog (yes, I know, that’ll have the Pulitzer people shaking in their boots), to be awarded on an irregular basis to that journalist or commentator who has shown themselves to be absurdly under-educated in the field of economics while still feeling competent to pronounce upon it. Ladies and Gentlemen, the winner of the first Economic Idiot Award is David Winning, of the Press Association City Staff. A quick look at Google News shows that several papers picked up his comment:

Oil prices rose today amid concerns that the fatal explosion at a BP refinery in Texas would leave the energy industry more overstretched.

A barrel of US light crude for May delivery rose 47 US cents to 54.28 US dollars in early trading in the Far East, following the blast which killed at least 14 people and injured more than 100 others.

The Telegraph rewrote it as:

Oil prices have risen because of the explosion amid fears  that the energy industry will be left overstretched.

and Ireland Online as:

Oil prices rose today amid concerns that the fatal explosion at a BP refinery in Texas would leave the energy industry more overstretched.

What qualifies this for the the tag of idiocy? After all, it is factually correct that there was an explosion at a refinery and oil prices did rise. The foolishness lies in ascribing one to the other, in the implication of causality.

Consider, crude oil, the price of which rose, is the raw material which flows into a refinery. The explosion means there is less capacity to refine that crude. There is therefore x amount of crude per day being pumped which cannot be refined. (X, according to whether the entire refinery is shut or just that small portion that went bang, could be 430,000 or 25,000.) This, ceteris paribus
(econspeak from the priestly caste meaning all other things being equal), means that the price of crude will fall, given that crude is a difficult and expensive thing to store.

Yet as Mr Winning notes, the price of crude rose. So the correct report is:

Oil prices rose today despite the fatal explosion at a BP refinery

Well done Mr. Winning, a worthy winner I think we can all agree. The prize is for your manager to buy you a basic economics textbook, Samuelson or Lipsey perhaps, plus the time off to read and absorb the lessons.

I welcome nominations for future such awards and am well aware that I shall myself be nominated at times. Quite right too, only by people pointing to our errors do we ever actually learn anything.

March 26, 2005 in Economic Idiot Award | Permalink


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As often with (neoliberal) economic arguments, yours rests on the assumption that movements in prices are rational responses to new information. Plenty of buying and selling is done on the expectation that others will respond to a change in a particular datum in a particular way whether or not the change really is relevant to (the supply of) the goods concerned.

I'm not saying that your economic idiots have the correct explanation for yesterday's movement in the price of crude, but I am saying that it would be reasonable (albeit clumsy) to reframe the newspaper reports you refer to as saying:

"The price of oil rose because many traders in the market expected other traders to respond to news of an explosion at an oil refinery by buying (some proxy for) oil."

Anyone who entered a commodities (or equities) market committed to trade rationally and actively, informed solely by textbook economics and armed with a hefty pile of cash, would leave it pretty soon afterwards, poorer. To put it another way: if you were apprenticed to an experienced---that is, successful---open-outcry type for a day, the first thing (s)he would tell you is where to shove your copy of Samuelson.

Besides, any attempt to apply simple supply-and-demand reasoning to a resource whose price is, shall we say, "smoothed" by one of the biggest cartels of all time is going to have some problems.

Tim adds: Much of what you say is true, most especially the point that successful trading depends not on underlying economic forces, but what you think other people think about them (I have worked on a forex desk, even if only as the reporting clerk, and then as an intern). But I still stand by the point that a lessening of refinery capacity is not going to raise crude prices. It may well raise gasoline prices, but not crude, rather the opposite.

Posted by: PooterGeek | Mar 26, 2005 12:21:42 PM

"The prize is for your manager to buy you a basic economics textbook, Samuelson"

surely that's too hefty a punishment? and don't we want to improve his economic reasoning? send him Exchange and Production instead!

Posted by: AJE | Mar 26, 2005 3:55:55 PM

Showing your age recommending Lipsey, Tim.

Tim adds: Could well be. All hip replacements and wondering which sort of cancer to get from here on in. Well, OK, not quite that bad just reaching the peaks of maturity at coff coff years old.

Posted by: Jarndyce | Mar 26, 2005 5:17:04 PM

You will need a staff of 100s to keep upw ith al the nominees for the Economic Idiot Award . . .

Posted by: Barry Ritholtz | Mar 26, 2005 6:31:02 PM

Re: Pootergeek's comment - was it Keynes who said that the market can remain irrational longer than you can remain solvent?

Posted by: Giles | Mar 26, 2005 7:00:41 PM

Keynes remained irrational well past his lifetime.

Posted by: Fred Boness | Mar 27, 2005 3:44:38 AM

if gold ore was purified by 10 (ie) producers and one has an explosion ,purified gold would go up in price and so would gold ore...sounds sensible to me

Posted by: e m butler | Mar 27, 2005 4:11:07 AM

The original article would make sense if the refinery was capable of dealing with heavier grades of oil. Knocking out capacity to refine heavier grades would imply that light grades faced lower substitution pressure, and so be more valuable; note that the original article only stated that the price of light crude rose.

Posted by: Brent Buckner | Mar 28, 2005 2:07:08 PM

Cock crows...sun rises...film at 11

Posted by: snidely | Mar 30, 2005 3:24:50 AM

I'd hold off on giving that award just yet. An explosion at a gasoline refinery almost certainly will raise crude prices at least in the short term. While crude is quite a liquid commodity (no pun intended), it is not perfectly so. Therefore, there is a limited amount of crude working its way through the global refining process at any given time. An explosion at a refinery will immediatly cause refined products price to rise as incremental supply will be lost. Other refiners will, therefore, go out into the crude market and increase their purchases to increase their refining to meet the increased demand for products resulting from the explosion taking the refiner offline. Additionally, uncertainty will result from the explosion no matter how you look at it and uncertainty almost always causes price increases. So, the combination of uncertainty and the momentary increase in crude demand from other refiners hoping to meet short-term demand increase for products will more than offset any lessened demand brought on by the single refiner going down.

Posted by: J Greene | Mar 30, 2005 10:33:38 PM