The big swings in recent oil prices have caused a lot of speculation about what causes them. One popular speculation is that speculation itself–that is, speculators–pushes prices in one direction or other. But in a recent commentary, J. Christoph Amberger pooh-poohs this possibility, making the observation that speculators do not actually deal in physical oil, just paper futures. The option valuations of these futures are not the basis of supply and demand, just anticipation of those factors.
Amberger argues that buyers and sellers of the real stuff are the people who influence oil prices. Prices are the result of a self-optimizing process in which each buyer or seller operates like an ant in an ant colony. Each deals independently with to make decisions under uncertainty. Accordingly, statistical analysis of this market activity can be done with “swarm intelligence,” a form of neural network analysis used to model decentralized behavior patterns. In a swarm intelligence network, the neurons act independently, following very simple rules to create complex behavior–sort of like a flock of birds or a herd of cows.
What drives this swarm? Simple, says Amberger, the same factors that drive exploration and production of oil–simple old supply and demand.