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Oil Prices & Wishful Thinking

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  • Richard Risemberg
    http://www.nytimes.com/2008/06/27/opinion/27krugman.html?ref=opinion ... -- Richard Risemberg http://www.bicyclefixation.com http://www.newcolonist.com
    Message 1 of 1 , Jun 27, 2008
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      > June 27, 2008
      > Fuels on the Hill
      > Congress has always had a soft spot for “experts” who tell members
      > what they want to hear, whether it’s supply-side economists
      > declaring that tax cuts increase revenue or climate-change skeptics
      > insisting that global warming is a myth.
      > Right now, the welcome mat is out for analysts who claim that out-
      > of-control speculators are responsible for $4-a-gallon gas.
      > 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. He
      > presented charts showing the growth of the oil futures market, in
      > which investors buy and sell promises to deliver oil at a later
      > date, and claimed that “the increase in demand from index
      > speculators” — his term for institutional investors who buy
      > commodity futures — “is almost equal to the increase in demand from
      > China.”
      > 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.
      > But members of Congress liked what they heard, and since that
      > testimony much of Capitol Hill has jumped on the blame-the-
      > speculators bandwagon.
      > Somewhat surprisingly, Republicans have been at least as willing as
      > Democrats to denounce evil speculators. But it turns out that
      > conservative faith in free markets somehow evaporates when it comes
      > to oil. For example, National Review has been publishing articles
      > blaming speculators for high oil prices for years, ever since the
      > price passed $50 a barrel.
      > And it was John McCain, not Barack Obama, who recently said this:
      > “While a few reckless speculators are counting their paper profits,
      > most Americans are coming up on the short end — using more and more
      > of their hard-earned paychecks to buy gas.”
      > Why are politicians so eager to pin the blame for oil prices on
      > speculators? Because it lets them believe that we don’t have to
      > adapt to a world of expensive gas.
      > Indeed, this past Monday Mr. Masters assured a House subcommittee
      > that a return to the days of cheap oil is more or less there for
      > the asking. If Congress passed legislation restricting speculation,
      > he said, gasoline prices would fall almost 50 percent in a matter
      > of weeks.
      > O.K., let’s talk about the reality.
      > 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.
      > 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.
      > In any case, one thing is clear: the hyperventilation over oil-
      > market speculation is distracting us from the real issues.
      > Regulating futures markets more tightly isn’t a bad idea, but it
      > won’t bring back the days of cheap oil. Nothing will. Oil prices
      > will fluctuate in the coming years — I wouldn’t be surprised if
      > they slip for a while as consumers drive less, switch to more fuel-
      > efficient cars, and so on — but the long-term trend is surely up.
      > Most of the adjustment to higher oil prices will take place through
      > private initiative, but the government can help the private sector
      > in a variety of ways, such as helping develop alternative-energy
      > technologies and new methods of conservation and expanding the
      > availability of public transit.
      > But we won’t have even the beginnings of a rational energy policy
      > if we listen to people who assure us that we can just wish high oil
      > prices away.

      Richard Risemberg
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