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Demand, Not Speculation, Causing Rise In Oil Prices

Posted By Conn Carroll On June 27, 2008 @ 10:22 am In Energy | Comments Disabled

A major plank of Speaker Nancy Pelosi’s (D-CA) efforts to convince the American people that liberals actually want to reduce gas prices is a bill that adds “new restrictions for commodity traders whose speculation has driven up the price of oil. [1]” But as liberal New York Times columnist Paul Krugman shows today, blaming speculators for the price of gas is long on politics and short on reality. Krugman writes [2]:

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.

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. … 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.


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URL to article: http://blog.heritage.org/2008/06/27/demand-not-speculation-causing-rise-in-oil-prices/

URLs in this post:

[1] new restrictions for commodity traders whose speculation has driven up the price of oil.: http://dyn.politico.com/printstory.cfm?uuid=C2116A20-3048-5C12-00B81597C5406B09

[2] writes: http://www.nytimes.com/2008/06/27/opinion/27krugman.html?ref=todayspaper

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