Reactions to story from EconLog: Library of Economics and Liberty

Reactions / posts that link to this post

  • Photo of jbchilton

    Oil bubble? Economists wonder

    http://emirateseconomist.blogspot.com/2008/05/oil-bubble-eco...
    199 days ago in The Emirates Economist · Authority: 25

    James Hamilton at Econbrowser: I do not believe that speculation is the reason oil went from $60 to $120 a barrel. The biggest part of that longer term trend is due to fundamentals, not speculation. Notwithstanding, it does appear that speculation has gotten ahead of those fundamentals in the most recent developments. For the bubble to continue, we would need to see ever-increasing volumes of investment money pouring into the futures markets, and continuing stagnation in global production to ratify them. Even if the former occurs, my best guess is that the latter will not. Charles Engel at RGE: The problem for economists is that the market for oil is so complicated that we cannot very accurately calculate what the price of oil “should be” if there is no bubble. We have to read the entrails to figure out whether the price is really reflecting market fundamentals – demand, supply, real interest rates – or has a bubble component. As I look at the rising price, I wonder which story is most plausible: (1) the markets have been surprised over and over about demand by end users and production capabilities; (2) markets have been surprised over and over about how low real interest rates are; (3) there is a bubble. These stories may go together, in fact. Indeed, it is hard to see how a bubble could get started all by itself, or how it could go on for a long time before it popped. Paul Krugman: If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price. ... So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going. Arnold Kling at EconLog I do not believe that the oil price today reflects a bubble. So in that respect, Krugman and I are not on opposite sides. Nonetheless, I do think that his model of the oil market has some strange properties. Krugman ignores two elements of the oil market. Explictly, he ignores forward prices. Implicitly, he ignores the decision by producers either to pump oil or keep it in the ground. UPDATE: More from James Hamilton. Labels: oil prices