Friday, June 27, 2008

More on oil speculation

Krugman has an op-ed in today's New York Times arguing against a role of speculators in $140 a barrel oil.

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,, 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.

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.

You see, 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 percent. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

He basically wants us to stop blaming the evil speculator boogey-man and get on with accepting that high prices are here to stay. This seems to have started a back and forth among the "economists who also blog" that is mainly over my head... but I thought this post by Arnold Kling seems to sum up the parts that I actually understand.

We agree that trying to reduce oil demand by getting rid of speculators is foolish. Knowing what we know now, we seem to think that the price of oil is close to where it belongs, although events could change that.

Krugman and Hamilton want to account for the excess oil that should appear as the price shoots up from $60 to $130+ per barrel. Krugman says that the fact that it does not show up in above-ground inventories is a sign that speculation is not at work. Cowen and I say that the excess oil might be underground, although I have to do a lot of hand-waving and fall back on the fudge factor of "convenience yield," given that futures prices are not far above spot prices.

Hamilton says, eloquently, that "China already burned" the excess oil. That probably ought to go down as the definitive assessment.

And soon athletes from around the world will be breathing it! I hope they enjoy it; that stuffs not cheap.