It’s really hard to defend the efficient markets hypothesis. The theory seems so unrealistic. I recall that when I began blogging in early 2009 the price of oil had just plummeted from $147/barrel to about $38/barrel. It was hard to explain to people that the price of $147 was completely rational, given what investors knew in mid-2008. That demand from developing countries had driven prices sky-high, not nefarious “speculators.” Thus I had frequent debates with commenters.
But guess what happened. When output recovered in the developing world prices shot right back up. Not all the way to $147/barrel; after all, output is still quite depressed in the developed world. But well over $100 for the so-called Brent crude (West Texas prices are currently distorted by pipeline limitations.) So now we know that speculators weren’t the cause of high prices in 2008, it was actual demand for oil. James Hamilton is one of the world’s leading experts on oil prices, and he is very concerned about where we are going to get the oil to meet rising demand in countries like China:
In any case, the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. But I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we’re talking about an oil price above $100/barrel in the first place.
Never sell the EMH short. No matter how wrong it seems, no matter how irrational markets may seem, there is usually a rational expectation.