"The Oil Bubble: Set to Burst?" That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse. Ten months later, oil was selling for $70 a barrel. "It's a huge bubble," declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble "look like a picnic." All through oil's five-year price surge, which has taken it from $25 a barrel to last week's close above $125, there have been many voices declaring that it's all a bubble, unsupported by the fundamentals of supply and demand. So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren't, why have so many commentators insisted, year after year, that there's an oil bubble? Now, speculators do sometimes push commodity prices far above the level justified by fundamentals. But when that happens, there are telltale signs that just aren't there in today's oil market.
Ten months later, oil was selling for $70 a barrel. "It's a huge bubble," declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble "look like a picnic."
All through oil's five-year price surge, which has taken it from $25 a barrel to last week's close above $125, there have been many voices declaring that it's all a bubble, unsupported by the fundamentals of supply and demand.
So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren't, why have so many commentators insisted, year after year, that there's an oil bubble?
Now, speculators do sometimes push commodity prices far above the level justified by fundamentals. But when that happens, there are telltale signs that just aren't there in today's oil market.
Saying that high-priced oil isn't a bubble doesn't mean that oil prices will never decline. I wouldn't be shocked if a pullback in demand, driven by delayed effects of high prices, sends the price of crude back below $100 for a while. But it does mean that speculators aren't at the heart of the story. Why, then, do we keep hearing assertions that they are? ... But there's also a political component. Traditionally, denunciations of speculators come from the left of the political spectrum. In the case of oil prices, however, the most vociferous proponents of the view that it's all the speculators' fault have been conservatives -- people whom you wouldn't normally expect to see warning about the nefarious activities of investment banks and hedge funds. The explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology.
Why, then, do we keep hearing assertions that they are?
...
But there's also a political component.
Traditionally, denunciations of speculators come from the left of the political spectrum. In the case of oil prices, however, the most vociferous proponents of the view that it's all the speculators' fault have been conservatives -- people whom you wouldn't normally expect to see warning about the nefarious activities of investment banks and hedge funds.
The explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology.
It's only when conservatives start saying things that they start to matter.
