> June 27, 2008
> OP-ED COLUMNIST
> Fuels on the Hill
> By PAUL KRUGMAN
> 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
> 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
> 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
> 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.