by Ryan Avent
One of the fun little economic discussions during the past few months focused on just how much of the increase in oil prices was due to speculation. Dean Baker, for instance, says some. Paul Krugman says not much. Today, Megan McArdle concludes:
I think we can officially say there was a sizeable speculative premium in oil, given that major troubles in one of the world's major oil-producing regions did little to halt its fall. On the other hand, if that speculative premium was $40--the mid-to-high range of analyst estimates--then we're close to having wiped it out at this point. Don't start pricing minivans just yet.
I disagree with Megan (though not about the minivans) and remain in the Paul Krugman camp. Why? For starters, short-term geopolitical supply disruptions don't actually affect oil prices all that much. Oil prices are trying to balance long-term supply with long-term demand. A relatively short crisis like that in Georgia doesn't much influence the fundamentals--how much oil China is going to need, say, versus how much remains in Saudi Arabia's Ghawar Field.
But strange as it may seem, we don't have to turn to speculation to explain the rapid decline in oil prices. Or rather, we don't have to turn to the kind of speculation folks mean when they say speculation.
You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)