Unfortunately, it looks like Paul Krugman has dug his heels in on the issue of speculation in the oil market. He doesn't think the surge in speculation in the futures market is driving oil prices higher, and it'll take a veritable smoking gun to change his mind. Krugman's argument reminds me of the old joke about economists, where the senior economics professor says to the junior economics professor, "Your idea may work well in practice, but it will never work in theory." Essentially, Krugman says that speculation isn't the driving force behind the rising oil prices because inventories haven't risen (he has made other peripheral points, but this is the heart of his argument). He admits that keeping oil in the ground is the equivalent of building up physical inventories, but brushes that fact off. For example:
OK, you can offer excuses. Maybe the oil inventories are being held in the ground; but do we have any evidence that oil producing countries are withholding output?Well, there's this:
King Abdullah, reported by the official news agency this month, said: "I keep no secret from you that when there were some new finds, I told them: 'No, leave it in the ground, with grace from God, our children need it'."And this:
Some producers, such as the U.A.E., are easing back at times on the crucial industry practice of injecting natural gas into crude oil fields, which is done to boost reservoir pressure and increase crude recovery rates. Halting the injections ends up undercutting oil production, further reducing exports.Finally, there's the fact that OPEC refused to boost production right in the middle of the run-up in oil prices. Yves Smith, for example, has generally taken the opposite view, arguing that speculation may indeed be driving up oil prices. As Smith notes, it's impossible to determine how much oil is being inventoried in the ground. Unfortunately, the debate between Krugman and thoughtful proponents of a speculation theory, such as Smith, has gone something like this: Krugman: "Inventories aren't rising, so speculation isn't important." Smith: "But oil inventories are more likely to be held in the ground." Krugman: "Show me the data on oil being kept in the ground." Smith: "That data doesn't exist." Krugman: "I win." Color me unconvinced—by either side.