Solved: Sometimes speculators get it wrong In the months

before the
Sometimes speculators get it wrong In the months before the

Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators
drove up the price of oil: The average price in October 1990 was $36 per barrel, more than
double its price in 1988. Oil speculators, like many people around the world, expected the Gulf
War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators
either bought oil on the open market (almost always at the high speculative price) or they
already owned oil and just kept it in storage. Either way, their plan was the same: to sell it in the
future, when prices might even be higher.

As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi
troops and a 100-hour ground war, then President George H. W. Bush declared a cessation of
hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait’s oil fields, the price
of oil plummeted to about $20 per barrel, a price at which it remained for years.

a. Is buying oil for $36 a barrel and selling it for $20 per barrel a good business plan? How
much profit did speculators earn, or how much money did they lose, on each barrel?

b. Why did the speculators follow this plan?

c. When the speculators sold their stored oil in the months after the war, did this massive resale
tend to increase the price of oil or decrease it?

d. Do you think that many consumers complained about speculators or even realized that
speculators were influencing the price of oil in spring 1991?

Sometimes speculators get it wrong In the months before the

ANSWER
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