OPINION
The
so-called oil bubble
By Paul Krugman
Published: May 12,
2008http://www.iht.com/articles/2008/05/12/opinion/edkrugman.php
The Oil Bubble: Set
to Burst? That was the headline of an October 2004 article in National Review,
which argued that oil prices, then $50 a barrel, would soon collapse.
Ten months later,
oil was selling for $70 a barrel. Its a huge bubble, declared Steve Forbes,
the publisher, who warned that the coming crash in oil prices would make the
popping of the technology bubble look like a picnic.
All through oils
five-year price surge, which has taken it from $25 a barrel to last weeks
close above $125, there have been many voices declaring that its all a bubble,
unsupported by the fundamentals of supply and demand.
So here are two
questions: Are speculators mainly, or even largely, responsible for high oil
prices? And if they arent, why have so many commentators insisted, year after
year, that theres an oil bubble?
Now, speculators
do sometimes push commodity prices far above the level justified by
fundamentals. But when that happens, there are telltale signs that just arent
there in todays oil market.
Imagine what
would happen if the oil market were humming along, with supply and demand
balanced at a price of $25 a barrel, and a bunch of speculators came in and
drove the price up to $100.
Even if this were
purely a financial play on the part of the speculators, it would have major
consequences in the material world. Faced with higher prices, drivers would cut
back on their driving; homeowners would turn down their thermostats; owners of
marginal oil wells would put them back into production.
As a result, the
initial balance between supply and demand would be broken, replaced with a
situation in which supply exceeded demand. This excess supply would, in turn,
drive prices back down again - unless someone were willing to buy up the excess
and take it off the market.
The only way
speculation can have a persistent effect on oil prices, then, is if it leads to
physical hoarding - an increase in private inventories of black gunk. This
actually happened in the late 1970s, when the effects of disrupted Iranian
supply
were amplified by widespread panic stockpiling.
But it hasnt
happened this time: all through the period of the alleged bubble, inventories
have remained at more or less normal levels. This tells us that the rise in oil
prices isnt the result of runaway speculation; its the result of fundamental
factors, mainly the growing difficulty of finding oil and the rapid growth of
emerging economies like China. The rise in oil prices these past few
years had to happen to keep demand growth from exceeding supply growth.
Saying that high-priced
oil isnt a bubble doesnt mean that oil prices will never decline. I wouldnt
be shocked if a pullback in demand, driven by delayed effects of high prices,
sends the price of crude back below $100 for a while. But it does mean that
speculators arent at the heart of the story.
Why, then, do we
keep hearing assertions that they are?
Part of the
answer may be the undoubted fact that many people are now investing in oil
futures - which feeds suspicion that speculators are running the show, even
though theres no good evidence that prices have gotten out of line.
But theres also
a political component.
Traditionally,
denunciations of speculators come from the left of the political spectrum. In
the case of oil prices, however, the most vociferous proponents of the view
that its all the speculators fault have been conservatives - people who you
wouldnt normally expect to see warning about the nefarious activities of
investment banks and hedge funds.
The explanation
of this seeming paradox is that wishful thinking has trumped pro-market
ideology.
After all, a
realistic view of whats happened over the past few years suggests that were
heading into an era of increasingly scarce, costly oil.
The consequences
of that scarcity probably wont be apocalyptic: Franceconsumes only half as
much oil per capita
as America, yet the last time I looked, Pariswasnt a howling wasteland. But
the odds
are that were looking at a future in which energy conservation becomes
increasingly important, in which many people may even - gasp - take public
transit to work.
I dont find that
vision particularly abhorrent, but a lot of people, especially on the right, do.
And so they want to believe that if only Goldman Sachs would stop having such a
negative attitude, wed quickly return to the good old days of abundant oil.
Again, I wouldnt
be shocked if oil prices dip in the near future - although I also take
seriously Goldmans recent warning that the price could go to $200. But lets
drop all the talk about an oil bubble.
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