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2023 | OriginalPaper | Buchkapitel

2. Oil, Money, and Yields

verfasst von : Ilia Bouchouev

Erschienen in: Virtual Barrels

Verlag: Springer Nature Switzerland

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Abstract

By looking at a hypothetical economy where oil and US dollar function as two alternative standards of money, we arrive at the replica of the Fisher inflation law, which can be seen as the first rigorously defined quantitative carry trade. We revive a largely forgotten Keynesian concept of commodity own rate of interest and show how it relates to the convenience yield in the physical market and the roll yield in trading futures.

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Fußnoten
1
See Fisher (1896). For consistency with contemporary conventions adopted in the economic literature, our definitions of certain terms differ from Fisher’s original formulation. For example, we use commodity price appreciation in terms of money to characterize commodity inflation, in contrast to Fisher’s choice of looking at inflation as money depreciation in terms of commodities.
 
2
The term spot price is used only for pedagogical clarity. We will explain shortly that oil spot prices with instantaneous delivery do not really exist, and the spot price should be understood as the forward contract with the nearest delivery.
 
3
Sraffa (1932) only defined the concept by virtue of the following example of borrowing bales of cotton: “The rate of interest … per hundred bales of cotton, is the number of bales that can be purchased with the following sum of money: the interest on the money required to buy spot 100 bales, plus the excess (or minus the deficiency) of the spot over the forward prices of the 100 bales”.
 
4
See Keynes (1936), chapter 17. Keynes restated Sraffa’s definition algebraically, which triggered a heated debate between the two economists in a series of letters. The debate was caused by their disagreement on whether to use spot prices or forward prices in defining the dollar cost of borrowing the commodity. While it may appear to be a small technical nuance, it led to a more profound philosophical differences in the interpretation of the concept. For details, see, e.g., Naldi (2015). In this book, we accept the definition as it was stated by Keynes, which simply mimics the definition of the interest rate on fiat money.
 
5
The one-year continuously compounded interest rate is conventionally defined as the following limit
\( {e}^r=\underset{n\to \infty }{\lim }{\left(1+\frac{r}{n}\right)}^n, \) where n is a number of times interest is compounded in a year.
 
6
The history of SPR sales and loans is summarized in Bouchouev (2022).
 
7
The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960. The membership of OPEC has varied over the years. As of 2022, OPEC included thirteen countries with the largest producer being Saudi Arabia. A larger but more loosely structured organization, known as OPEC+, which included several other major sovereign producers, was formed in 2016.
 
8
From the testimony of Patrick C. Boyle, proprietor and publisher of The Oil City Derrick at the Hearing of the US Industrial Commission on Trusts and Industrial Combinations, see Boyle (1899). The testimony was subsequently reprinted in Whiteshot (1905). It describes the origins of oil trading and highlights that dump men were the predecessors of the oil refiners. The dump business is also described in Smiley (1907), who wrote that “the dumps in those days were practically the exchange, and made the market price for oil each day”. Many other interesting facts related to the early days of oil drilling in Pennsylvania, including the construction of first wooden oil tanks, are given by Giddens (1947).
 
9
Kaldor (1939) writes that “in normal circumstances, stocks of all goods possess a yield, measured in terms of themselves, and this yield which is a compensation to the holder of stocks, must be deducted from carrying costs proper in calculating net carrying costs. The latter can, therefore, be negative or positive.”
 
10
See, for example, Geman (2005) and Hull (2018).
 
11
The term excess return differs from the total return as the latter includes the interest on collateral. Since in this book, for the most part, we ignore the interest on collateral for futures, the two terms are often used interchangeably. The distinction will become clearer in Chap. 4 in the context of fully collateralized commodity indices.
 
12
Unlike price changes and log-returns, simple percentage returns are not additive. This makes a similar decomposition for simple returns more complex. For simple returns, the roll return is formally defined as the difference between the excess return and the spot return.
 
Literatur
Zurück zum Zitat Bouchouev, I. (2022). The Strategic Petroleum Reserve strategies: Risk-free return or return-free risk? The Oxford Institute for Energy Studies. Bouchouev, I. (2022). The Strategic Petroleum Reserve strategies: Risk-free return or return-free risk? The Oxford Institute for Energy Studies.
Zurück zum Zitat Boyle, P. C. (1899, September 6). Testimony at the Hearing of the US Industrial Commission on Trusts and Industrial Combination. Boyle, P. C. (1899, September 6). Testimony at the Hearing of the US Industrial Commission on Trusts and Industrial Combination.
Zurück zum Zitat Fisher, I. (1896). Appreciation and interest. Publications of the American Economic Association, 11(4), 331–442. Fisher, I. (1896). Appreciation and interest. Publications of the American Economic Association, 11(4), 331–442.
Zurück zum Zitat Geman, H. (2005). Commodities and commodity derivatives: Modeling and pricing for agriculturals, metals and energy. Wiley. Geman, H. (2005). Commodities and commodity derivatives: Modeling and pricing for agriculturals, metals and energy. Wiley.
Zurück zum Zitat Giddens, P. H. (1947). Pennsylvania petroleum 1750–1872: A documentary history. Pennsylvania Historical and Museum Commission. Giddens, P. H. (1947). Pennsylvania petroleum 1750–1872: A documentary history. Pennsylvania Historical and Museum Commission.
Zurück zum Zitat Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.MATH Hull, J. C. (2018). Options, futures, and other derivatives (10th ed.). Pearson.MATH
Zurück zum Zitat Kaldor, N. (1939). Speculation and economic stability. The Review of Economic Studies, 7(1), 1–27.CrossRef Kaldor, N. (1939). Speculation and economic stability. The Review of Economic Studies, 7(1), 1–27.CrossRef
Zurück zum Zitat Keynes, J. M. (1936). The general theory of employment, interest, and money. Macmillan. Keynes, J. M. (1936). The general theory of employment, interest, and money. Macmillan.
Zurück zum Zitat Naldi, N. (2015). Sraffa and Keynes on the concept of commodity rates of interest. Contributions to Political Economy, 34(1), 17–30.CrossRef Naldi, N. (2015). Sraffa and Keynes on the concept of commodity rates of interest. Contributions to Political Economy, 34(1), 17–30.CrossRef
Zurück zum Zitat Smiley, A. W. (1907). A few scraps: Oily and otherwise. The Derrick Publishing Company. Smiley, A. W. (1907). A few scraps: Oily and otherwise. The Derrick Publishing Company.
Zurück zum Zitat Sraffa, P. (1932). Dr. Hayek on money and capital. The Economic Journal, 42 (165), 42–53.CrossRef Sraffa, P. (1932). Dr. Hayek on money and capital. The Economic Journal, 42 (165), 42–53.CrossRef
Zurück zum Zitat Whiteshot, C. A. (1905). The oil-well driller: A history of the world’s greatest enterprise, the oil industry. Acme Publishing Company. Whiteshot, C. A. (1905). The oil-well driller: A history of the world’s greatest enterprise, the oil industry. Acme Publishing Company.
Metadaten
Titel
Oil, Money, and Yields
verfasst von
Ilia Bouchouev
Copyright-Jahr
2023
DOI
https://doi.org/10.1007/978-3-031-36151-7_2