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.You liar, Krugman! We all know Big Oil is hiding it with the UFOs in Area 51.Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.
Tuesday, July 8, 2008
Why speculators are not to blame for high oil prices
This was a follow up by Princeton economist Paul Krugman to his original oil non-bubble article.
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"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."
ReplyDeleteInteresting. What do you think about the fact that the growing demand is to a large part caused by transportation, that is, unleaded gasoline?
I say this because gasoline is a distillate of the light, sweet crude oil, the benchmark for which is NYMEX West Texas Intermediate (WTI).
And it is the price of this benchmark that has been surging not that of the heavy, sour crude oil produced mainly by the Middle Eastern members of OPEC.
So when Saudi Arabia promises to increase production by 300,000 barrels per day, the price of US light crude went up, not down.
The answer has to be to increase the investment in special refining capacity that can process the heavy crudes to produce gasoline.
This I believe explains the question about the "black hole" of inventories or the missing oil.
What do you think?