PermaLinkSixty Minutes: Speculation Caused Oil Price Increases
09:27:24 PM

I took a lot of flak from various people for taking the position earlier this year that the conventional explanation of supply and demand, India and China, etc., etc., was not sufficient to explain the rise in oil prices. I initially blamed speculation, simply on the premise that lots of smart money was fleeing the stock market, and it must be going somewhere, and what we were seeing in oil futures was exactly the result one would expect when lots of money moves into a market seeking profits. When smart economists (this year's Nobel winner, Paul Krugman, for one) said that the signs of speculation in the market were simply not there, I still did not accept the simple supply and demand explanation and I blamed oil company windfall profits. After one night of doing lots of math to try and back up that position, I came to the conclusion that I was wrong, so I grudgingly accepted that Exxon and the other big oil companies were increasing their profits in proportion to their increase in investment in obtaining the supply they brought to market, and therefore I concluded that supply and demand must be it.


But when the credit crisis hit, and oil prices plummetted, I asked myself who was more likely to stop bidding on oil futures -- real users of oil, or highly leveraged speculators whose credit lines were dissolving. I once again started questioning the supply and demand explanation.


Now, according to a report on CBS's 60 Minutes, it seems that I was right in the first place. It was speculation.


This not to say that the supply and demand situation isn't changing. It is . This is not to say that demand in India in China hasn't gone up and won't continue to go up. It has and it will. There's still no question that the oil-consuming world will have to deal with this. But demand from India and China didn't cause ~$150/barrel oil this year.

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