Krugman on Oil

Krugman takes on the theory that increased activity in oil trading has some relation to the spike in oil prices in today's Times.

It's a pretty good article (more snow is falling in Hell), but I am not that surprised.  Krugman is a respected economist when he is not beating his breast as a political hack for the left side of the spectrum.

He does make one strange comment, though:

"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."

I don't think Masters' point was that betting on oil prices was equivalent to burning it.  Surely Krugman is sophisticated enough to see that Masters was pointing out that there was a large inflow of capital into the futures market and that should increase the value of the contracts themselves.  It's not the same as burning oil, but when oil is partially priced through the futures market, it is similar in effect to an increase in demand for the barrels themselves.  The Internet bubble was not caused by some underlying shortage of crappy web-based companies.  It was caused by an abundance of capital chasing their paper and bidding it up.

But Krugman does admit that there is a question whether or not all this money coming into the commodities market has created a speculative bubble.  And so (snow day in City of Dis public schools!), we seem to reach a similar conclusion:

"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."

Along the way he beats down some straw men.  Conservatives are allowed to believe in the efficiency of free-markets, but that doesn't exclude reasonable regulation.  I don't know any so-called conservatives who just think we should let markets run wild.

Still, some interesting perspective from Krugman and I agree that this is the kind of theory that politicians love because it makes it seem like there is an easy fix to today's energy problem.