Paul is losing it on oil. Here, let me help out, because I like Paul and don't want to see him head too far down into farmer Jones's bean patch.
First, he fails job one, which is to explain how the world acquisition price of barrel of oil can have remained so far above its lifting cost for so long in a commodities market, while all demand is being met and stocks-on-hand are 'normal' for high prices levels...
Of course there is a bubble.
READING "THE SIGNS"
Of course prices can be artificially high for long periods, especially since the marginal supply is "managed" by a cartel (and in other ways). How long was Cisco-Systems priced as if they were going to wire the world 10 times over? How long was Xerox priced in the 70s so that it's share price discounted the hereafter, as was once famously observed? When everyone is on the same side of the trade, you may not call it 'speculation', per se, but its effect on prices is ... quite bubbly! [or tragic, if you have a look at where 'AAA-rated' tranches of sub-prime CDOs are trading simply because no one wants them ...]
Demand is largely inelastic in the short-run (even the medium term).
There IS hoarding going on, to some extent (we pump into the oil reserve) and reason to believe that broader hoarding might start if prices double again from here. People just remember that prices fell, twice before. Once there is recessionary-level pain, they will abandon that, quickly.
It's not "fundamental factors", except in the Shiller-way, i.e. as part of the "story" that is fueling price rises.
A NEW ERA?
There is no reason (update: Reason article) to believe an era of scare oil is on the way, except as generalized anxiety about Hubbard's peak. I don't have detailed information, but the vast new supplies seem to be coming on line only at a net trickle.
Even if there is a new era (don't all bubbles come with a prescription of a new, "permanently higher plateau", Mr. Fischer?), scarcity will have a very meaningful impact on the developing nations (and world security) - America's fill-'er-up is not the only standard by which to judge what is "apocalyptic" or not.
DANGER WILL ROBINSON
Whatever the case, the price will NOT stay where it is today.
Either supply will be allowed to catch up sufficiently to drown out the bulls (the Saudis have already turned down Bush-Cheney twice, so it won't be from them, this time), or the price will find 'equilibrium' when it is clear how far it has to go to cause a worldwide "macro" recession, which is really the only way that mid-term demand strength is going to be quelled (apart from a precipitous dollar collapse).
Tuesday, May 13, 2008
Krugman Takes a Bubble Bath
