Paul Krugman and libertarian economist agree–speculation isn’t the cause the high oil prices

High oil prices has caused some strange alliances. Both Republican and Democrats seem to agree that speculators are to blame for the high oil prices. John McCain for example recently said, “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.” Barack Obama, not to be outdone by McCain’s, has called for “abuses in oil speculation.”

But more interestingly Paul Krugman, who is much more sympathetic to the Democrats, and libertarian economists believe that speculation isn’t to blame. Krugman writes:

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.

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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.

Libertarian economist Robert Murphy reaches the same conclusion. He writes:

• Record-high oil prices demand a target, and some politicians are increasingly pointing the finger at speculators in the commodities futures markets. But high oil prices are due to restricted supply, booming demand, and a weakening dollar.
• There is no hard evidence that speculators are responsible for high oil prices. If the price of oil truly were above the level that the fundamentals could support, we would see growing inventories of crude. But inventory levels show no such pattern.
• Speculators provide a vital function. By buying when prices are low and selling when prices are high, they actually make oil prices less volatile. Large investment funds provide liquidity to the commodities futures markets, and allow producers and consumers to concentrate on their core businesses.

It’s a weird world when libertarians and Krugman agree. Stranger still when the Republicans and Democrats agree. But when Republicans and Democrats agree, you know that it must be politically expedient. Too bad that politicially expediency doesn’t help the people.