IS ECONOMICS A SCIENCE?

BLOMBERG (19 February, 2016) HERE

Shell Game: Their Leveraged Derivative Trade Is The Market Fundamental (25 Nov. 2017)

Summary

Shell dominated Brent oil trading to such an extent that it moved the market even against global fundamental supply & demand.

Physical supply & demand fundamentals are insufficient in modeling a complex, dynamic system like global oil markets.

Leveraged derivatives create herding behavior, inter-connectedness, and price extremes.

In this article, we will examine a specific market event in which it is alleged that Royal Dutch Shell moved the global Brent price against the fundamentals of global supply and demand.

February 2017: Shell Shakes Up Oil Trading World

This Bloomberg article from 19 February 2017 discusses Royal Dutch Shell’s involvement in the Brent derivative market in April 2016. The article asserts that Shell was a buyer, sufficient in quantity, to move the market price contrary to the fundamentals of global supply and demand. Shell is the world’s largest oil trader, and as a result can amass leveraged positions that dwarf physical trade volume. Shell, like all large market participants, can accomplish this activity because the global crude oil market is a financialized, globalized, complex adaptive system. In such a system, their leveraged positioning (certainly amongst other inputs) IS the market fundamental. To understand this more clearly, we need to briefly look at classical economics and complexity economics.

Financial media, like much of consensus financial industry analysis, is guided by linear, deterministic cause and effect models, largely borrowed from classical physics. Additionally, the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example). Finally, reductionism (the idea that society and its institutions do not differ from its individual agents) rounds out the major pillars of what could be called classical economics. While this system and its derived models might have been sufficient in an era of predominantly industrialized economic activity, the development of modern globalization, financialization, and post-industrial economic activity (informational/technological) render classical economic models and thinking, at minimum, incomplete in adequately understanding capital flow and properly assessing risk in a complex adaptive system like the global crude market.

Comment

Unfortunately the rest of the article is behind a pay wall (a spreading habit in web posting, I note). Hence, I cannot comment on the phenomenon).

However, there is enough to suggest that the old tools of ‘suppply and demand’ diagrams are increasingly irrelevant. Recently, I have been given to questioning these former fundamentals in Economics, even classing some uses of S-D relationships as systemically flawed, especially in the case of Marshallian S-D 'cross' diagrams as taught and drawn endlessly in Economics 101 and believed in right throughout the profession.

Take this extraction from the above: “the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example).”

I would swap the statement in the above quotation:

“in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof” with “perporting” to “explain” price movement. There is no “supply/demand equilibrium”. Any way, how would participants in markets know that their agreed price was in a unique “equilibrium”? All agreements on price are in a sort of ‘equilibrium’ for that transaction but not for all transactions across all transactions.

On ‘Black’ Friday or ‘Cyber’ Monday where is the uniquely “equilibrium” price?

As for 'Adam Smith’s Invisible Hand as an example' I can only shake my head in despair ...