Speculators who think that a war in the Middle East is likely will buy oil futures, pushing up the futures price (the price agreed on today for delivery in the future). If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that supply disruptions may soon occur. Futures prices for oil, currencies, and many commodities can be found in a newspaper or online, so anyone who wants to forecast events in the Middle East can benefit from reading price signals.

Futures prices can be extraordinarily informative about future events. The major factor determining the price of orange juice futures, for example, is the weather. If bad weather is expected to cause a frost destroying many oranges, the price of OJ futures will be high. If good weather and a bumper crop are expected, the price will be low. The economist Richard Roll found that the futures price for OJ was so sensitive to the weather that it could be used to improve the predictions of the National Weather Service!10

It’s not hard to see the future if you know where to look. In December 1991, the United Nations and the Worldwatch Institute warned that wheat would be very scarce in the coming year. Economist Paul Heyne looked in the newspaper and found that on that day the price of wheat was $4.05 a bushel. But the futures price for the following December was $3.51. Speculators, unlike the Worldwatch Institute, were not forecasting increased scarcity. In whose forecast would you put more confidence: that of the Worldwatch Institute or that of wheat speculators? Why?*

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The futures price of oil can be used to predict war in the Middle East, but that is a side benefit of the futures market and not its purpose. Factors other than war (e.g., the decisions of OPEC, oil discoveries, and the demand for oil) also affect oil futures, so the futures price of oil is a noisy signal of war in the Middle East. A phone line with static—that’s a noisy signal. Electrical engineers work to increase the signal-to-noise ratio on cell phones. More recently, economic engineers have begun to design markets to increase the signal-to-noise ratio of prices.