[Marxism] More liberal wisdom on oil

bauerly at yorku.ca bauerly at yorku.ca
Fri Jun 27 06:42:59 MDT 2008

Fuels on the Hill
Congress has always had a soft spot for “experts” who tell members what they
want to hear, whether it’s supply-side economists declaring that tax cuts
increase revenue or climate-change skeptics insisting that global warming is a

Right now, the welcome mat is out for analysts who claim that out-of-control
speculators are responsible for $4-a-gallon gas.

Back in May, Michael Masters, a hedge fund manager, made a big splash when he
told a Senate committee that speculation is the main cause of rising prices for
oil and other raw materials. He presented charts showing the growth of the oil
futures market, in which investors buy and sell promises to deliver oil at a
later date, and claimed that “the increase in demand from index speculators” —
his term for institutional investors who buy commodity futures — “is almost
equal to the increase in demand from China.”

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.

But members of Congress liked what they heard, and since that testimony much of
Capitol Hill has jumped on the blame-the-speculators bandwagon.

Somewhat surprisingly, Republicans have been at least as willing as Democrats to
denounce evil speculators. But it turns out that conservative faith in free
markets somehow evaporates when it comes to oil. For example, National Review
has been publishing articles blaming speculators for high oil prices for years,
ever since the price passed $50 a barrel.

And it was John McCain, not Barack Obama, who recently said this: “While a few
reckless speculators are counting their paper profits, most Americans are
coming up on the short end — using more and more of their hard-earned paychecks
to buy gas.”

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.

Indeed, this past Monday Mr. Masters assured a House subcommittee that a return
to the days of cheap oil is more or less there for the asking. If Congress
passed legislation restricting speculation, he said, gasoline prices would fall
almost 50 percent in a matter of weeks.

O.K., let’s talk about the reality.

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. (Readers
who want to wonk themselves out can go to my blog, krugman.blogs.nytimes.com,
and follow the links.) 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.

In any case, one thing is clear: the hyperventilation over oil-market
speculation is distracting us from the real issues.

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.

Most of the adjustment to higher oil prices will take place through private
initiative, but the government can help the private sector in a variety of
ways, such as helping develop alternative-energy technologies and new methods
of conservation and expanding the availability of public transit.

But we won’t have even the beginnings of a rational energy policy if we listen
to people who assure us that we can just wish high oil prices away.

>>>I especially like how he opened by equating those who think speculation is
playing a role in oil prices with neoliberals and global warming deniers and
how he closed by saying it is up to private initiative and the private sector
to solve the energy crisis.  Wow, do you really think more of the same will
solve the problem?


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