Paul Krugman joins the chorus calling b.s. on congress’ populist demagoguing on oil prices. Specifically, he says that $140 oil is the result of short supply and high demand and that speculators have little if anything to do with it:
Why aren’t speculators the problem? First, because trading futures contracts doesn’t actually do anything to influence supply and demand fundamentals:
Back in May, Michael Masters, a hedge fund manager, made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials… Many economists scoffed: Mr. Masters was making the bizarre claim that betting on a higher price of oil — for that is what it means to buy a futures contract — is equivalent to actually burning the stuff…
Is speculation playing a role in high oil prices? It’s not out of the question. Economists were right to scoff at Mr. Masters — buying a futures contract doesn’t directly reduce the supply of oil to consumers — but under some circumstances, speculation in the oil futures market can indirectly raise prices, encouraging producers and other players to hoard oil rather than making it available for use.
Whether that’s happening now is a subject of highly technical dispute. (Readers who want to wonk themselves out can go to my blog, krugman.blogs.nytimes.com, and follow the links.) Suffice it to say that some economists, myself included, make much of the fact that the usual telltale signs of a speculative price boom are missing. But other economists argue, in effect, that absence of evidence isn’t solid evidence of absence.
Krugman’s other argument is that higher oil prices are related to higher demand from emerging markets, because iron ore prices, a commodity for which there are no major speculative markets, have shot through the roo,f too:
…iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year. In particular, the price Chinese steel makers pay to Australian mines has just jumped 96 per cent. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.
The sooner Congress admits that high oil prices aren’t some kind of Wall Street scheme, the sooner it can talk about real solutions. Don’t hold your breath.
Business Insider Emails & Alerts
Site highlights each day to your inbox.