What's to blame for high oil prices? Republicans blame failure to open up ANWR and other off limit areas to drilling. Democrats blame oil company price gouging and failure of BushCo to have a comprehensive energy policy. Both of them blame commodity market speculators.
New York Times columnist and Princeton professor of economics Paul Krugman explores the popular view that market speculation is a major reason why oil prices increased from $25 per barrel to $125 per barrel over the past several years.
Krugman writes
Now, speculators do sometimes push commodity prices far above the level justified by [supply and demand] fundamentals. But when that happens, there are telltale signs that just aren’t there in today’s oil market.
Krugman continues:
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: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
Krugman points out that if market fundamentals shift toward more global supply and/or less global demand, that prices may drop. But
"I also take seriously Goldman’s recent warning that the price could go to $200.
Goldman Sachs was in the minority when, a few years ago, they predicted a market fundamentals driven "super spike" that would lead to oil prices over $100 a barrel. Their recent warning is for $150-200 a barrel oil sometime in the next 6-24 months.
$200 a barrel oil means $6 per gallon gasoline.
The answer? lowkell, a former US Energy Information Administration international oil markets analyst, writes
Slash oil consumption, slash oil consumption, slash oil consumption. Did I mention slash oil consumption? Oh, and how about a crash "Apollo program" to slash oil consumption?
For my part, I'll be buying one of these 50 mpg cars when they go on sale later this summer.
Jerome a Paris has a series Countdown to $200 oil where he explores this issue in more depth.
Update: We can add polar bears to the list of those who will be blamed for $200 per barrel oil. One wonders who will be added to the list of villains next.