Consensus and Cities

Note: this is the first post in a series of 3-4 articles about consensus urbanism.

The dominant discourse on cities nowadays focuses on the role of visionary, top-down innovation. Some write about mayors who change paradigms, such as Michael Bloomberg and now Rahm Emanuel. Others write about entrepreneurs and the role of new technology, and invariably portray the change as groundbreaking and unforeseen by all except the dogged inventor. In contrast to this worldview, let me propose a view of urbanism based on political consensus among disparate interests, on forging agreement instead of trying to defeat everyone else.

The current trend toward livable cities, as seen in road diets and bike lane projects, is entirely top-driven. Bloomberg decided to make it his legacy, and Transportation Commissioner Janette Sadik-Khan moves aggressively with little consultation with community interests except those that already agree with her. Rahm Emanuel, infamous for his combative style, followed suit. This caused livable streets advocates, led by Streetsblog, to often identify community consensus with NIMBYism and top-down change with improvement; it’s unavoidable on Streetsblog, though sometimes there are glimpses of support for a more consensus-based policy on other livable streets blogs.

In reality, in cities, there are too many interest groups for one to normally dominate: labor, the middle class, multiple kinds of business, organized religion – and in the exceptional cases, such as Singapore, it comes out of autocracy. This is especially true in the US, with its multi-ethnic cities, requiring delicate acts of ticket-balancing. This is easy to paper over in majoritarian political systems, as the US is, but the actual practice of politics in American cities is far from majoritarian. Liberal cities have become cities of primaries – one wins by assembling an ad hoc coalition that can win the Democratic primary. In general, cities have multiple interest groups, even independently of ethnicity: see for example Christof Spieler’s analysis of the 2009 Houston mayoral race. The reason this political process hasn’t led to a consensus-based decision making is that the electoral process – in particular, the authoritarian strong-mayor system – is anti-consensus.

And yet, a consensus-based agenda is possible. As one of the Streetsblog community members explained to me, the way to obtain community support for a project is to talk to all stakeholders in the neighborhood, and understand what their hidden hopes and fears are; it’s important to avoid any situation in which someone later complains “Nobody informed me about this.” Ordinary people are far less intransigent than they can appear in the papers. For example, along Queens Boulevard, the long-term residents are still reeling from plans to turn the street into an expressway, and therefore will support or oppose a livable streets proposal in part based on whether they perceive it as turning the street into more of a highway (closing cross-streets) or less of one (widening sidewalks).

A community so empowered with its own ideas about how to make itself pedestrian-friendlier will of course help if a top-down reformist politician wants to make the city more livable, but it can also convince an apathetic politician to champion its cause if it can demonstrate that this cause is popular. The same is true of many other public projects and contentious issues; support for many of them crosses ideological and partisan boundaries, both the normal national ones and the specific issue of machinists vs. reformists in American cities.

Consensus must be contrasted with its distant top-down cousin, outreach. Outreach is what a partisan or dominant side in a debate does to get the little fish on board. There’s almost no possibility of dialogue. In contrast, consensus implicitly assumes that all stakeholders own the decision, more or less equally even if one side began the push for it and in reality did most of the work. One can imagine a community board agreeing to a development plan put forth by a mayor, and then criticizing the mayor for it after it fails; one can’t imagine the same if the community board is the body that created the plan.

Film critic Pauline Kael, when asked to comment on why Nixon won the 1972 election, refused to comment, saying she couldn’t know because nobody she knew voted for him. (This has been misquoted in conservative circles as her saying that she couldn’t believe he could have won.) Kael’s contrition was unusual; most people are more than happy to generalize based on the few people they know who fit a type, or, even worse, based on stereotypes they’ve heard from others. It’s bad enough in a bipartisan world, but in city politics, the large number of different factions and worldviews is such that no one force can possibly know enough to govern for everyone.

Although the political process of any non-autocratic city forces some cooperation among groups, the practice can be authoritarian enough that many are completely unheard of in the halls of power. This is especially true of recent immigrants and others who have no long-term activist presence, or of racial minorities in cities with a majority race and racist politics. But even groups with some organization and voting power can be shut out by a Bloomberg, an Emanuel, or even a Villaraigosa. The result is that even policy that isn’t malevolent can be destructive; this is the sin of many postwar urban renewal programs, which didn’t have to accommodate the concerns of the neighborhoods they leveled and had no intention of listening to anyone they didn’t have to listen to.

The alternative is to embark on a process that’s slow, but more robust. It’s immune to changes in electoral fortunes, since swings from 52-48 to 48-52 don’t have such a huge impact on policy. The roads movement in the US got everything it wanted from the 1910s to the 1950s, from governing ideologies ranging from Hooverism to New Deal liberalism. It’s important to imitate this one aspect of the roads movement, and ensure as many groups as possible pull in the same direction.

There are always authoritarians-in-making, people who pay lip service to any consensual and democratic concept they need to be seen to support but in reality seek power for themselves and surround themselves with yes-men. Those we need to be watchful of, to make sure that they never have the power to cause permanent damage. Streetsblog has shown glimpses of holding the Bloomberg administration’s feet to the fire on issues on which the city has not been a positive force for livability – for example, the 1st/2nd Avenue bike lanes – but we need to do more than that, and ensure that even if an autocrat has power, we use him more than he uses us.

Switching from a fundamentally authoritarian booster mentality to consensus governance has no hope of getting us demolition of low-performing or city-splitting freeways, or Hong Kong-style traffic restraint, at least not until the far future. It will take a long time to overturn preexisting anti-urban biases – even longer than necessary, since it will be based on consultation with many groups that oppose gentrification and find what’s happening to American cities now a bad thing. It requires letting go of many proposals that are currently too expensive, and focusing on making the process friendlier to good transit and walkability and less so to boondoggles and pollution. It requires sitting down with people we may find abhorrent on other issues. Its saving grace is only that, in the medium and long runs, it works.


  1. Andre Lot

    The idea of consensus might seem right, but it is only workable if tied with more individual freedoms for people or business. Otherwise, one could end with a consensus-based, but relatively oppressive and conforming society like Netherlands (where I live now) or Switzerland, not on your personal choices themselves, but on your ability to deviate from the consensus.

  2. Jeffrey Jakucyk

    “…the way to obtain community support for a project is to talk to all stakeholders in the neighborhood, and understand what their hidden hopes and fears are…”

    That can be somewhat risky though, and it seems to be the way many projects do happen on a more local level. The problem is that only the stakeholders are involved. Thus you get the project’s proponents versus the NIMBY’s, basically everyone with a vested interest in the project happening or not happening. The sad part is that they are usually highly polarized, but that’s the name of the game of course. Those who are apathetic about the project don’t show up to the community meetings or voice their opinion. That’s a big loss, since there’s no non-vested interests to bring a balancing point of view to the discussion. It’s a balancing that’s needed however. Those people who are not directly impacted by the project need to be brought in to evaluate and comment on it in more of a “greater good” aspect.

    That’s the real problem with the public process, at least here in the US. The vested interests, the stakeholders, whether for or against, are the ones given all the attention and credibility. In reality though, they should be the ones viewed with skepticism and held back from the process to some extent, because they have obvious biases and, well, vested interests! The ones who should be given more say in the matter are the ones who aren’t intimately involved and don’t have any preconceived notions or strong feelings about it. The hard part is figuring out just how to get them involved in the first place. As it is, the process is like having a court of law without a jury.

    • Alon Levy

      Of course it’s risky, but the point is that more often than not, there isn’t all that much polarization. A lot of power brokers like creating polarization because it gives them more power, but communities often come up with decent compromise alternatives by themselves – for example, New York’s unfortunately non-binding 197a plans. And the idea of consensus in national politics has had some successes, especially but not only in government reform, though it’s gotten a lot of flak from a) Tea Party/Club for Growth control over the Republican Party, and b) people confusing Ted Kennedy- and Lindsey Graham-style governing with bland non-ideological bipartisanship. It boils down to the fact that people are not as stupid as their leaders, even if those leaders are businesslike and innovative.

    • Beta Magellan

      There also isn’t much polarization because there frankly isn’t much interest in transportation as a policy matter. I remember once hearing that coinage reform (i. e. getting rid of the penny) is one of the few topics which gets equal Democratic and Republican support: almost no one on either side cares about it. Although transportation’s a lot more visible, outside a small community of policymakers, planners, activists and enthusiasts it isn’t an issue which people tend to think of as a policy one—it’s there with the weather in the morning news. As Aaron Renn observed, in Chicago transportation’s complained about as if there’s no human agency over it. That leads to apathy (in this case a lack of user-oriented transit advocacy beyond the occasional bus riders’ union type stuff, whose proposals tend to be low capital cost/high operating cost/low benefit), leaving a vacuum allowing the vested interests Jeffrey mentions to swoop in.

  3. EngineerScotty

    My longstanding position is that there will be a larger level of support for greater levels of density and public transport when gas starts to get really expensive. Right now, gas prices are just below the pain threshold (which appears, in the US, to be about $4/gallon), and there’s still a big section of the electorate who believes that there are policy levers which could be pulled to dramatically reduce prices, but which are being blocked by environmentalists (a group which is alleged to include the Obama administration). Also, if and when the current Tea Party current in US politics blows itself out, and things like transit stop acting as cultural markers, it will help. (A related problem is that many disaffected and displaced workers in the US blame the environmental movement write large, and not capitalists, for their present misery).

    Some promising signs here in Portland–the city has taken notice that many of its urban renewal schemes over the past decade have resulted in displacement of communities due to gentrification, an issue which has come to a head over a controversial proposal to replace an auto traffic lane with a bike thoroughfare through a predominantly African-America neighborhood (one which was devastated several decades prior to make way for the I-5 freeway); a bike thoroughfare which many of the local residents object to.

    I think that a key issue in building consensus is getting the involvement of (and being mindful of the interests of) renters, both residential and commercial. Many redevelopments are hostile to the interests of those who don’t own their own place, with the windfalls accruing to property owners, and tenants getting little out of the process other than higher rents–or in cases where the landlord seeks to “upgrade” his properties, eviction notices.

    • Danny

      I agree that there is very little that we can do in terms of policy to remedy high gas prices. It is a commodity product that is fairly liberally regulated, and any internal efforts such as drilling will provide near zero benefit in reducing prices. I don’t appreciate the misplaced jab at capitalists though ;)

      My personal opinion (backed by several urban economists BTW) is that gentrification can be mitigated, if not prevented completely, by simple liberalization of zoning/construction restrictions. The reason why urban infrastructure causes gentrification is because urban infrastructure increases demand. Without the ability to respond to that increase in demand with more housing, property values will rise. And since supply is already relatively inelastic and made extremely inelastic (almost perfectly inelastic in some cases) by housing restrictions, small increases in demand will wildly swing property values upwards, to the benefit of property owners and at the expense of renters who must keep pace or move out. The only way to simultaneously improve urban infrastructure and maintain affordable rent rates is to make sure that housing supply keeps pace with the new demand.

      • Danny

        BTW, zoning restrictions are one area where consensus can be extremely difficult to achieve. Zoning restrictions are an explicit benefit to property owners, whose interests are opposite that of renters. In any situation with a moderate mix of property owners/renters, that consensus will be extremely hard to come by.

        Complicating matters is the incorrectly perceived corporatist nature of deregulation. So while liberalizing zoning restrictions will ultimately benefit the renter due to increased competition, many have the perception that they empower owners, which moves consensus in the wrong direction.

        • Andre Lot


          Zoning is one of the trickiest areas in which complete de-regulation will result in chaos (so no regulation is not an option in a civilized society). Absence of zoning do create the most dense neighborhoods in the World, namely African and Asian slums (and some in Latin America) without height, but completely unhealthy spaces and dangerous (for fires etc).

          There are good reasons to have zoning and building code laws. The question is how they are managed.

          Often, though not always, gentrification goes hand-in-hand with a sharp increase in the available residential surface within a given area, via redevelopment/restructuring of forming industrial estates, green/brownfield development etc. In many cases, turning a blighted but well located area into something normal will increase rents so much that even a 2, 3 fold increase in surface available would not be enough to put rents within reach of old inhabitants. It is the old situation (good location, derelict buildings, blighted neighborhoods = cheap rent, no interest in home-owning) that is anomalous, not the post-redevelopment one.

          In any case, the stakeholders in a re-zoning discussion are many, and the zoning discussion itself some interests are impossible to reconcile via a consensus-search. It’s hard to align interests that have no common ground but a loose “we want the best for our city” shared common motto.

          • Alon Levy

            Just a relatively minor and off-topic note: gentrification-induced high-rises do not always involve such an increase in available housing. Increasingly, neighborhoods under threat of gentrification are functional working-class and even middle-class neighborhoods, so there isn’t much abandoned housing, and conversely the new upper-class high-rises are sometimes built in Le Corbusier style with plenty of open space. It doesn’t happen in New York, where space is so expensive those towers are built on a base rather than in a park, so clearly very high land values can prevent this from happening. But in Tel Aviv, the housing unit density in the new high-rises is not much higher than in the traditional 4-story garden apartment buildings of the Old North. And the Old North, despite looking blighted, has always been upper middle-class, its neglected appearance coming from the use of high-maintenance building materials.

            More on-topic, what’s happening in Houston is an example of how multiple interests forge consensus. The emerging consensus is not a good one – it’s an alliance of NIMBYs and developers, leading to development restrictions in existing neighborhoods and a free-for-all in the urban fringe – but this result is very path-dependent, boiling down to the personalities of the mayoral candidates in the foursquare race. The mayoral race was close, and for a while the smart growth candidate led in the polls. New York’s 197a process is another consensus, though one that’s made toothless: again, it’s not a perfect consensus, since it often privileged long-term residents with cars and is much more pro-preservation than it should be, but it involves a relatively neighborhood-friendly process of upzoning.

          • EngineerScotty

            There’s a meaningful difference between building codes–based on safety standards–and much of the zoning code, which is more geared towards protecting incumbent property values by a) excluding conflicting uses, and b) limiting supply. I’ve no problem with fire codes, and I’ve no problem with zoning regulations which prevent my neighbor from raising hogs or running a smelter in his back 40. Much of the zoning code (as well as private covenants) though is geared towards preventing activities which may result in a drop in a neighbor’s property value, but don’t necessarily interfere with his utilization thereof.

            And that is, I think, and important difference. If hypothetical Joe’s neighbor starts raising hogs, the resulting pollution will materially interfere with the enjoyment of Joe’s property–he can no longer utilize it for its intended purpose. If, on the other hand, Joe’s neighbor turns his property into a duplex, this use does not directly harm Joe. (Joe might end up with unpleasant neighbors, but this could happen regardless). It may result in some marginal increase in consumption of local infrastructure and it might reduce Joe’s property value somewhat–there’s a premium for not living near multifamily housing in the real estate market. OTOH, the real estate market reflects many cultural prejudices which public policy chooses not to recognize.

            I’m all for taking a skeptical view of zoning regulations whose only real purpose is exclusion.

          • Danny

            You can count me in with EngineerScotty’s opinion on zoning vs building code. I’m not advocating hog-wild (literally) stupidity. I just want development to follow demand, rather than whatever lowest common denominator of demand is still allowed after everything else is excluded.

            I’ve had some nasty personal experiences with zoning agencies, so I could very well be biased in my own right…but I think there is enough of a professional economic opinion and empirical evidence to support my opinion.

          • Beta Magellan

            Although I don’t have any hard data, I also get the impression that sometimes gentrification results in more living space/person, so in cases where there’s little new construction (or new construction’s very contextual) you might also see a drop in density, especially if it’s simple replacement of lower-income people with higher-income people.

          • EngineerScotty

            it’s simple replacement of lower-income people with higher-income people.
            Am I correct that this is assuming high-income households are smaller than lower-income ones? Or is there another factor here?

          • Alon Levy

            Scotty, the issue Andre is invoking is that high-income people live in larger dwellings, and therefore at equal floor area ratio they will live at lower housing unit density. Akirov Towers have about 200 m^2 of gross floor area per apartment, vs. 120 for normal Old North apartments (though the towers presumably have a lower ratio of net leasable area to gross area); if you try to express it in terms of floor area ratio on the lot, the towers have an FAR of 2.5, whereas traditional Old North buildings have an FAR of 1.5-2.

          • Beta Magellan

            Just glancing at some 2003 household income data on wikipedia, household size goes up with income—but so does the number of earners, so I’m not prepared to say anything.

            My idea was more based on what I’ve seen in the part of Chicago I live in now—many of the old triple-deckers were subdivided into six departments during the 1940’s and remain so today, usually with garden and a coach house apartment or two. In contrast, infill housing tends to either follow the old triple-decker footprint with one apartment (or condo) per floor and no garden or coach house units, plus the odd row of two-three story townhouses. People with more money live in newer housing with more space, people with less money in older housing with less space.

      • EngineerScotty

        I’ll happily salute to the relaxation of zoning restrictions. But WRT my “misplaced jab at capitalists”, here in Orygun (where we had our tea tantrum a decade earlier than the rest of the country), there are many displaced timberworkers who blame their plight on the spotted owl, ignoring a few other factors just as significant to the demise of the NW timber industry:
        * The end of the “raw log export ban” in the mid-1980s, which led to the outsourcing of much millwork.
        * Liberalized trade agreements with Canada, opening up US markets to British Columbia timber
        * Change in building codes to permit use of various Southern tree species in homebuilding (trees whose wood is arguably inferior to the Douglas fir), resulting in much domestic logging, as well as a few timber companies whose name still end in “-Pacific”, to the Southeastern US.
        I’m not arguing that these were bad things globally, or that environmental restrictions didn’t have an effect (they most certainly did), but blaming the owl is an overly simplistic narrative, but which is rather popular–and one which is easier to pass off on displaced workers than “you’re all overpaid”. (Though “your neighbor is overpaid” seems to work pretty well…)

        • Danny

          My “misplaced” wasn’t saying that environmentalists caused the joblessness (although for a minority of cases it is probably true, and yet still desirable). It more has to do with the fact that it isn’t capitalists make the terrible decisions, but rather consumers. Capitalists are slaves to the market. WalMart is one of the largest companies in the world not because Sam Walton hated overpaid workers, but because consumers hated overpaid workers. Sam Walton gave the consumers what they wanted…cheap shit. The same applies in situations revolving around trade and outsourcing…decisions that are blamed on capitalists but forced on them by consumers.

          Of course there are exceptions to the rule of capitalists being slaves to consumers, but those exceptions are A) not very common at all, B) not the companies that are constantly blamed for such social ills, C) tend to be extremely innovative and create value that didn’t exist before, or D) the result of a politically protected monopoly.

        • Danny

          To ensure my reply isn’t completely off topic, I think the whole bias/blame-placing tendency of humans makes consensus-based action an untrustworthy source of improvement.

          Take evolutionary science for example. For the most part, information is readily available, empirically proven, and incontrovertible. And yet we still have the threat of creationist curricula being inserted into our schools, simply because in some instances, the biases run so deep that they can’t be overcome.

          In this sense, I really appreciate the role that Jarrett Walker plays in transportation debates. I don’t always agree with his pure trade-off style view, because I think there is plenty of waste that can provide more bang for your buck. But he consistently attacks biases, which are really the only reason why we still make bad decisions in consensus environments.

          • Beta Magellan

            Which brings up the question of expertise, which was pretty much the only thing that went through my head when I read this—where is its place?

          • Alon Levy

            Very good question. I see three roles to the experts:

            1. What Jarrett does in his workshops, i.e. articulate the tradeoffs and limitations and help people articulate their own values.

            2. Offer an international consultant perspective, which may provide information that the actual stakeholders may be missing, e.g. about bus stop spacing practices abroad.

            3. Act as something like computers, answering narrow technical questions about what is or isn’t possible. For example, in the discussions in Providence about restoring service on the East Side Rail Tunnel, expert opinion about how hard it’d be to add a station at Thayer Street would be very useful.

            Technocracy is what happens when experts take role #2 too far, thinking of their perspective as elevated above all others.

          • Danny

            I see expertise like a good salesman. I say that hesitantly because most salesmen I know are complete asshats…but a good salesman will inform and persuade, but ultimately they let you decide for yourself in a way that you don’t regret.

            Jarrett is always telling people that his job is to inform people of their options, limitations, trade-offs, etc…but the design of transit systems has to be driven by the values of those who use it or benefit from it. That, IMO is the true role of experts.

            I would think that we have had enough bad experience with technocrats to know to stay away from them. But then again, we just blew half a billion on a green-tech vapor company because someone’s technocratic vision dictated that it was a good idea, so we haven’t gotten rid of the idea completely yet.

        • Beta Magellan

          Scotty, I’m pretty sure that a lot of Oregonian loggers know about the trade agreements—here in the Midwest, disdain for trade liberalization’s pretty much universal. I’ve even heard finance workers in the Loop—who’ve probably benefited more from globalization than most Midwesterners—complain about how free trade agreements with South Korea and Panama will leach away our wealth. It’s patent nonsense (and shows that working in finance doesn’t automatically make you an economic expert, or even very bright), but nonsense widely believed by the American public.

          All of this supports Danny’s remarks about implicit biases, and the difficulty of overcoming them.

          • EngineerScotty

            The issue with free trade, and productivity enhancements in general, is that they frequently cause economic upheaval to specific populations. If you’re an unemployed Oregon logger, it matters not one whit to you about how the overall GDP is improved by more efficient forestry practices–you’re not receiving any of it. And while the trade agreements are known, the most passionate anger is directed towards the environmental movement–which did, essentially, use the spotted owl (and other endangered species) as a way of trying to halt timber harvesting. Of course, said environmentalists did have legitimate objections to certain forestry practices which were commonplace, and the major timber producers were nowhere near the environmental stewards they liked to portray themselves as in their PR.

      • MobilMan

        Supply elasticity is the most important factor but there is a side of liberalized building that drives gentrification: building new housing is expensive. That’s how the gentrification phenomenon materializes. People build to make money which usually results in increased housing prices relative to the vicinity. One way to avoid social upheaval (if that’s a goal) is to mandate a percentage of affordable housing. Build as much as you want but make provisions for it in some direct/indirect way.

        • Andre Lot

          In light of the “search of consensus”, stable zoning provisions might ease the way to reach certain consensus on transit projects. This happens because one of the major concerns of homeowners in an area where a transit project (light rail, subway etc.) is going to be deployed is that they homeowners will be changed in a permanent and definitive way.

          I’m not condoning or opposing this view here (would require more space to elaborate on that), but I bring here a passage from EngineerScotty: ” Much of the zoning code (as well as private covenants) though is geared towards preventing activities which may result in a drop in a neighbor’s property value, but don’t necessarily interfere with his utilization thereof.”

          For many people who own and live long-term in their property, more than changes in property values the concern is about the desirability, in their own standards, of their neighborhood. The upper you go on the income/wealth ladder, the more nuanced such preferences depart from mere utilization. Of course, we can’t have absolute zoning or absolute property rights, so things like eminent domain or fair market value repurchase guarantee (common in UK) comes to the table.

          Eminent domain, on itself, is a contentious process in which the State compensates you, property owner, for the loss of your property for the greater good as decided by the political process. In countries were rights are preserved, this compensation is meant to be fair. It would be very, very rare to convince someone he/she should give his estate to the greater good via consensus.

          Maybe Alon will also address the paradox of last holdouts in the context of transit projects. Because transit projects have institutional inertia to keep moving on, sometimes it pays off if a person, or more common a small group (relative to the scope of project) stubbornly stays in the way of a project until it is the last holdout, so that the person/group puts itself in a position to extract more concessions, and extract them faster, because the project must go and, if the group is sufficiently small, it pays off (financially) to carve in to certain unreasonable demands just to avoid yet-another-court-fight. If I remember correctly, this happened recently in Toronto where a new light rail project was tied, at its last minute, with a very strong provision not allowing zoning changes on the main thoroughfare it was meant to cross (but now apparently they scrapped the projects after a new election). In the context of greenfield highway projects, that usually means getting a tunnel instead of a surface sector, or extra anti-noise barriers even if predicted noise without them is within regulations.

      • Wad

        For what it’s worth, there was an interesting development recently with regards to U.S. petrochemical imports.

        It’s been conventional wisdom that the U.S. imports about 2/3 of its petroleum.

        The Energy Information Administration now says the figure is 49%, not 67%. That’s because the figure now measures “net imports”, which allows U.S. exports to subtract from the import figure.

        Even with substantial U.S. production, there’s no good news in reduced dependence, either. We clearly drill-baby-drilled, and prices are hovering in the $3-$4 range. They aren’t going down, the final product is going to the highest bidder, not domestically.

        The high prices are also in effect speculators taxing the system by their bets. Oil contracts, much like options and futures, are heavily influenced by bets on movements. There aren’t precise figures on how much of these investments are pure speculation (as opposed to the holder taking physical delivery of the stock or commodity at the set price), but most figures show it to be more than 2/3 and as high as 90%.

        • Danny

          Most figures by whom? Mickey Mouse? I call BS.

          Oil prices most definitely can be swayed by speculation…but unlike tulip bulbs, bitcoins, gold, and houses, oil contracts have a “sell by” date on them. It is the date that they are due to be received in physical form.

          That means that someone that doesn’t have a production cistern (AKA a speculator) needs to sell to an actual producer before the contract comes due. There is no value in hoarding oil contracts. And therefore there is no long-term stable ability to increase prices through speculation.

          That is why a speculation driven run like that in 2008 had to come crashing down as speculators came to the realization that true demand was not as high as they thought it would be, triggering a selloff to actually get rid of the oil they had promised to buy but couldn’t store.

          • Wad

            Most of the market activity is driven by speculators, not producers and intermediate users. Most oil contracts, commodities contracts and options expire unredeemed.

            Speculators here aren’t trying to hoard supply. They’re betting on movements, and making their money from up or down price swings. It’s not price fixing or product manipulation, but these contracts are what is the de facto market price of oil (or gold or food commodities).

          • Danny

            I know most market activity is driven by speculation…but that is not the same thing as price being caused by speculation. Since oil contracts either expire (a total loss to the speculator) or are forced to take delivery, price is ultimately determined by users.

            If there are no systemic biases amongst speculators (~50% overspeculate and ~50% underspeculate) as a group, then increased speculation has zero effect on price, and an extreme positive effect on liquidity. Speculation can swing prices temporarily in one direction as we have seen, but the long term stable price is determined by the same boring supply and demand.

          • Wad

            Danny, what about the factor of commodity prices being set at the margin (the last price determines the rate for the future)?

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