Friday, May 23, 2008

Krugman on Oil

"'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. 'It's 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.' ... So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren't why have so many commentators insisted, year after year, that there's an oil bubbble? ... 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 hasn't happened this time. ... Traditionally, denunciations of speculators come from the left of the political spectrum. ... After all, a realistic view of what's happened over the past few years suggests that we're heading into an era of increasingly scare, costly oil. ... Again, I wouldn't be shocked if oil prices dip in the near future--although I also take seriously Goldman's recent warning that the price could go to $200. But let's drop all the talk about an oil bubble", Paul Krugman (PK) at the Houston Chronicle, 13 May 2008.

I agree with PK. The commentators are being misled because they think in terms of dollars as opposed to other currencies.

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