Inelasticity in physical commodities is surfacing as an issue as demand plummets

It's crazy to think about how novel the concept of supply contraction (as a direct function of demand) really is.

Folks would certainly be happier right now with oil as an asset, if its supply could decrease without environmental cost. We're facing a potential excess of some 15 million barrels/day through Q2.

It happens with commodites like wheat in the natural world. Only the supply of wheat increases or decreases as a function of weather, rather than exchange rate.

I can appreciate your reference to wheat, because another crop really caught my eye. Something like 35% of corn is used in ethanol. As a result corn is a commodity with an extremely tight link to the fate of oil and the dimishing consumption of gas, but not from a transportation cost of the commodity perspective. I'm tracking the effects of the oil surplus on oil prices, and I'll be looking to corn next. I've found this 2013 Scientific American article interesting and this 2019 updated note from the EIA good for getting me up to speed on ethanol as an input in gasoline

Something like 35% of corn is used in ethanol. As a result corn is a commodity with an extremely tight link to the fate of oil and the dimishing consumption of gas, but not from a transportation cost of the commodity perspective

Yeah it's a bit scary how interconnected everything is. All economists (regardless of political stance) seem to fear is the effects of large Boom & Bust cycles. The connected nature of today's global economy exacerbates their concerns. Short version is this:

1. Keynes seems to think we only need to worry about stimulating demand to get out of messes—and we can ignore supply.

2. Hayek seems to think that ignoring supply is what gets us into the messes to begin with—and things just get worse if we keep kicking the can down the road.

Ultimately, the idea that we just need to wait out downturns so we can learn lessons doesn't sell nearly as well (particularly in times of desperation)—whereas the idea that we can do something active sells quite well.

Talking about Keynes and Hayek in relation to oil is a little weird here... Sure, real world events caused the demand of oil to dry up, but that's natural given the lockdown. Would a keynesian argue we need to stimulate demand for oil right now? No, definitely not.

The supply problem of oil now is really just a logistics one, because the chain from ground to pump is so long and complicated. Would a Hayekian argue that the supply of oil should have been modulated outside the normal market dynamics. No, definitely not.

Sometimes world events cause supply or demand to dramatically shift beyond influence. What to do when it happens?

A lot of the oil oddities right now are exacerbated by financial instruments on top of it. The negative prices we're seeing on oil right now doesn't actually mean the price of oil is negative. The price of physically settled oil futures are negative.

Commodities traders (speculators) want exposure to oil without actually having to store it. So they'll buy futures, and make sure to off-load them before delivery. Then they'll usually buy the next month's future to roll their position.

The negative price of oil wasn't because refiners had produce too much and were paying people to take it off their hands. The May futures were expiring, financial buyers had purchased too much virtual oil, and were rushing to get rid of it.

The interesting question, and maybe where you were going anyway Evan, is does this teach us anything about digital money design? Can we deal with the problems of "huge drop in demand", and "avoidance of delivery"?

Avoidance of delivery is not really a problem with crypto, because it's way easier to store in your house than barrels of oil are. So the exacerbation from futures speculators probably wouldn't have occurred with crypto.

However, avoiding huge drops in demand, in a stressed market where all correlations are 1, probably means you don't want to rely on selling assets (any assets). I.e. instead of hoping buyers want to buy your collateral at auction, prefer direct feedback loops between market price and supply like AMPL. Or pretend not to care like BTC lol.

Talking about Keynes and Hayek in relation to oil is a little weird here... Sure, real world events caused the demand of oil to dry up, but that's natural given the lockdown. Would a keynesian argue we need to stimulate demand for oil right now? No, definitely not.

The broader picture is that we're clearly facing an economic shock. The oil price drop—calamity of the day so to speak—jostled markets, but is part of a highly interconnected ecosystem.

I do think a Keynesian would argue for stimulating demand right now—and I'm certain that's what fiscal and monetary packages have been doing.

The US is concerned about consumption on the whole—reduced travel due to the quarantine (among other things) is a serious problem for the economy that has cascading effects. One symptom of this is surfacing as a surplus of oil so pronounced that for a time its price entered strange territory.

The interesting question, and maybe where you were going anyway Evan, is does this teach us anything about digital money design? Can we deal with the problems of "huge drop in demand", and "avoidance of delivery"?

Good point, I do think it plays into the design of digital money insofar as we're thinking about the role of independent monies—which has little to do with activist stimulus—and is more a check against inflation and growing boom-bust cycles.

Oil is a commodity-money, not unlike gold. One of the flaws with such natural commodity-monies, is supply inelasticity.

Having too little supply or too much supply (as we see now) is toublesome because it means we simply have to sit on our hands and wait until demand catches up. In the meantime, this demand distortion wreaks havoc on other dependent markets.

Although market forces have commanded oil production to stop (starting May)—we will still have a surplus because we cannot decrease the supply of oil without cost (just as we cannot produce oil without cost).

A more ideal commodity-money (like AMPL) would be capable of adapting its supply with perfect elasticity.