Tag Archives: paul krugman

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.

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.

Paul Krugman and the libertarians agree–ethanol is “a terrible mistake”

It’s not everyday that a left-of-center economist like Paul Krugman agrees with the libertarians. But it’s not every day that politicians make as colossal mistake as they have with subsidizing and mandating biofuel and ethanol. But the case against the mandates and subsidies for ethanol, the case is clear. They are a scam. Earlier I wrote what I think is a path forward on ethanol policy.

Here’s Krugman’s take on biofuel:

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels.

The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states. [emphasis added].

This is what is sick about American biofuel policy–we are increasing the hardship for the poorest people in the world so politicians can court votes in farm states. That’s offensive.

Ron Bailey, who writes for the libertarian Reason magazine agrees with Krguman about ethanol’s problematic nature. Bailey writes:

Politicians in both the United States and the European Union are mandating that vast quantities of food be turned into fuel as they chase the chimera of “energy independence.” For example, Congress passed and President George W. Bush signed misbegotten legislation requiring fuel producers to use at least 36 billion gallons of biofuels by 2022-which equals about 27 percent of the gasoline Americans currently use each year and is about five times the amount being produced now. And the European Union set a goal that 10 percent of transport fuels come from biofuels by 2020.

The result of these mandates is that about 100 million tons of grain will be transformed this year into fuel, drawing down global grain stocks to their lowest levels in decades. Keep in mind that 100 million tons of grain is enough to feed nearly 450 million people for a year.

. . .

Expanding acreage to grow biofuels is bad for biodiversity and may even boost the carbon dioxide emissions that contribute to man-made global warming. Avery notes that food production needs to double because there will be more people who will want to eat better by 2050, at which point world population begins to slide back downwards. Turning food into fuel makes that goal much harder to achieve. Avery is right when he argues, “Biofuels are purely and simply the biggest Green mistake we’ve ever made and we’re still making it.”