Not surprisingly, Paul Krugman continues the partisan line that anyone who thinks that Obama's policies have anything to do with the pain at the pump is being paranoid. This is quite rich, especially given that Democrats en masse are claiming that it all is the work of those dastardly speculators.
And even though Krugman the economist should know that blaming speculators is like blaming wind for a tornado, we see that he keeps silent, which makes me wonder if he really believes this nonsense -- or if he is being cynically quiet. Either way, it seems that he is endorsing paranoia, or at least paranoia that is partisan in nature. (Gee, what happens when oil prices fall? Does that mean that speculators are taking a day off?)
Of course, what is a Krugman column that does not make excuses for Obama? During the campaign, Obama said that policies he wanted to put into place would cause energy policies to "skyrocket." Krugman says that the term was "unfortunate," although I doubt he would be so gracious to a Republican or to someone like Ron Paul.
Then there is the matter of Obama's energy secretary, Steven Chu. This is the same Steven Chu who before taking office declared:
“Somehow we have to figure out how to boost the price of gasoline to the levels in Europe”Chu conveniently claims he does not believe that now, although I doubt he is telling the truth. Like so many other Progressives, Chu believes that Americans should be forced into a lifestyle that people like Chu, Krugman, and Obama have no plans of adopting for themselves.
Then there is the small issue of the dollar and the fact that oil prices worldwide are denominated in that currency. The Ben Bernanke Fed is showering the world with dollars (although Krugman believes not enough dollars), so we should not be surprised that when the Fed deliberately engages in inflationary policies, that energy prices -- and other commodity prices, for that matter -- are going to go up.
Not surprisingly, Krugman calls all of this "paranoid." When people take Obama and his administration at their word that they want to force Americans out of fossil fuels (which Obama has vilified), and then the results create real economic pain, then suddenly we are supposed to believe that whatever Obama and his minions have said is irrelevant.
Once again, we see Paul Krugman abandoning economics for partisan rhetoric. No, we should not be surprised. Remember his claim that because Grover Norquist had once said that we should reduce government to a size where it can be "drowned in a bathtub," therefore all Republicans are wanting to do the same? Yes, the Bush administration was trying to reduce government. And I have a bridge in Brooklyn to sell to Krugman.
17 comments:
@Prof Anderson
Speculation has effected some commodities from what I have read, such as with wheat. I'm not 100% sold that there isn't some sort of monkey business going on with some of the big banks (especially the handful of recipients of the J Aron type letters like GS or JPM). I can never seem to get anyone to answer me on this and I would like your take.
The mechanism by which the zero or near zero interest policies and money printing by the central banks causes high oil prices seems pretty obvious, but almost never gets mentioned anywhere that I have seen. Most producers of oil want to pump and sell as much as they can, but many of them don't look at it that way. The latter see oil in the ground as an asset that they can, if they so choose, trade in for another asset, the US dollar, or keep it in the ground. If they need the cash, that is one thing, but what if they don't? What will go up in value the most over time, oil in the ground or US dollars, that the Fed is printing and giving to its friends (the banks and the government) as fast as it can, and on which you can earn the lordly rate of 0.2% if you invest for a year or 2.2% for ten years?
I'd take oil in the ground any day, and so would many others, who choose to produce and sell only enough to meet their cash needs and not much above that. Without Fed manipulation of interest rates the market would produce a positive real interest rate, which would give oil producers an incentive to produce and sell more oil, because the value of their dollar proceeds would have a much better chance of rising over time than oil in the ground would. Problem solved.
I am at a loss of words when I hear the President say that we are drilling everywhere in one breath and say "no amount of drilling will change the situation".
First part of that is a complete lie. Although drilling on private land has skyrocketed, bringing our output up, drilling on federal lands is way down. In fact, federal leases granted are at a 28 year low! No, we are not drilling everywhere. Just another lie that we have become accustomed to from this President!
The send part is also a mis-statement. We are sitting on top of nearly 2 trillion barrels of oil according to oil companies as well as the federal government. We have 200 years supply of oil, more than that in natural gas, and even more in coal resources. We are the most energy rich region of the world by far. I am talking about accessible oil here thanks to technological advancements over the past couple of years!
So here is what we need:
1) Drill everywhere where oil is using all the methods available
2) Build new refinaries as that is our biggest problem.
3) Build new nuclear power plants.
4) Pursue a strong dollar policy as oil is a dollar denominated commodity whose price reacts opposite way to the strength of the dollar.
5) Get rid of all progressives in the congress to remove roadblocks.
I am convinced that if we did all those 5 things, we would find ourselves in the midst of a new boom like we have never experienced (assuming we also become more responsible in our spending ways of course!)
It is just paranoia. There is no Progressive Conspiracy to increase the price of gasoline to stop consumption. Those people never said what they said, really didn't mean what they said nor do they believe now what they believed then.
So let me understand your position. As a self-proclaimed Austrian economist you believe that hundreds of billions of dollars pumped into the housing market directly contributed to the housing bubble. BUT you think anyone who notes that hundreds of billions of dollars flooding into oil futures contracts is "blaming wind for a tornado"?
And nobody else sees the disconnect in logic there? Well, if not then maybe consider that the last oil price jump back in 2008 just happend to coincide with a massive spike in the issuance of oil futures contracts:
http://blogs.reuters.com/globalinvesting/2008/06/06/growth-in-oil-futures-outpaces-oil-consumption-2/
There's a really good reference list here:
http://www.issues2000.org/2012/Barack_Obama_Energy_+_Oil.htm
SOME factors have been outside Obama's control. For example, BP only have themselves to blame for the Deepwater Horizon screw up, and if they had been on the ball and got that rig going there would have been others to follow. Because BP screwed up, now pretty much all offshore drilling has been blocked.
On the other hand, Obama was a great supporter of "cap and trade", and very much involved in the Chicago Climate Exchange, he has repeatedly called for higher taxes on oil companies, and wants a “Dirt Tax” to impose additional costs on the mining industry. He also pumped money into alternatives, such as Solyndra, and wind farms, etc.
What's more Obama insisted that the US should move towards energy independence, which can only mean throttling the foreign supply (and the falling value of the US dollar on international markets is one way to achieve this). When you throttle supply you raise prices.
All of these things are going to push up the price of energy (both electricity and transport fuel). Any reasonable person would recognise this... so we must accept that Obama knew his policies would raise prices at least to some extent.
On the other hand, prices were already on the way up even before Obama, and to be fair, no one knew for sure that his green initiatives would fail, so potentially things could have turned out better. No one knew that the whole "clean coal" initiative would be such a big flop (although some people did make suggestions to that effect).
You have to give Obama credit that he believed in something, and he went with his instinct, and tried to make it work. Sadly, it didn't work as expected, and now he has to explain that to the voters.
http://consultingbyrpm.com/blog/2012/03/econ-moment-oil-speculators-and-iran.html
Bob Murphy explains things pretty well there.
"What's more Obama insisted that the US should move towards energy independence, which can only mean throttling the foreign supply"
Or it could mean lowering consumption and expanded domestic production, both of which have taken place under Obama's watch.
Prof Anderson: Fed is showering the world with dollars ... so we should not be surprised that when the Fed deliberately engages in inflationary policies, that energy prices -- and other commodity prices, for that matter -- are going to go up.
If the rise in oil and commodity prices is entirely a U.S. dollar monetary effect, not a real effect (like shortages, increased demand etc) shouldn't the rise of these prices be not much above the general rise of price? Don't we need to look at the CPI-adjusted price of oil. Don't you need to look at some such data, or look at the price of oil in some other currency?
macroman: The only currency in which oil prices have not zoomed is the only currency that can't be printed central banks - gold. As I explained above, with central banks manufacturing fiat money at a rapid pace and keeping the interest yield on savings as close to zero as possible, the rational supplier of oil only sells enough to bring in the minimal amount of cash needed to pay bills. Selling more than that would be to trade a commodity likely to be in great demand for many years to come and whose cost to find keeps rising, for dollars or other currencies that earn next to nothing and keep going down in value against real things. Stop printing money, let interest rates rise to whatever the market decrees (highly likely to be higher than zero,) and watch oil producers gladly sell more oil to get the dollars.
Every oil producer would do this in the expectation that this would increase their long term wealth greater than keeping the oil in the ground; collectively the additional supply would push oil prices much lower. As I said above, problem solved.
macroman:
If the rise in oil and commodity prices is entirely a U.S. dollar monetary effect, not a real effect (like shortages, increased demand etc) shouldn't the rise of these prices be not much above the general rise of price?
No, it shouldn't actually, because inflation of the money supply doesn't affect all goods equally. It always enters the economy at certain distinct points. It affects different people differently, and it affects different goods differently.
This is especially the case when inflation takes the form of credit expansion from the banking system.
It is possible for the majority of inflation of the money supply to be concentrated in single industries, like housing, and education. Eventually, money spreads ENOUGH to result in something akin to "general price inflation", but by that time arrives, there will have already been a further series of inflation of the money supply, which again enters the economy at only distinct points, thus leading to more concentrated changes in spending and prices once again.
Inflation is like a water falling into a body of water. The level of water is rising, but depending on how the water is falling, the body of water will now always look the same.
If water falls at a single point, like a waterfall, then the higher the waves will become. Sure, there may be some wind that generates ripples across the surface of the water, but the larger waves near the waterfall are due to the waterfall, not the wind.
If water falls at maximum number of points, like rain, then the waves would be much smaller as the water level rose.
Our current monetary system is more like a waterfall than it is rain. The central bank tends to give money only to a select few financial institutions. That creates larger waves. If instead the Fed sent out small checks to every individual in the country, then the waves will be a lot smaller, and whatever waves exist, will be more closely reflect supply related issues.
In the waterfall economy, there will invariably be people furthest away from the waterfall and closest to the waterfall. Those in Wall Street, the military, Congress, these people tend to be closest to the waterfall. Pensioners, wage earners, widowers, teenagers, tend to be furthest away. Sometimes the people further away get near the waterfall. For example, the waterfall got so big so fast during 2001-2006 that those closest to the waterfall had so much more water so fast that they decided to throw water balloons at the people furthest out, to give them water for new homes. This is an exception however, not the rule.
@MF:
So accepting your Hayekian flow of funds view, to show that a rate of oil price inflation significantly greater than CPI-inflation is a monetary phenomon and not a real supply/demand phenomenon, you have to suppose that newly Fed-created money goes predominantly into buying oil.
But what makes you think that people selling their bonds to the Fed in return for newly crated money are rushing to buy oil rather than anything else? What's your evidence for this?
Macroman: "But what makes you think that people selling their bonds to the Fed in return for newly crated money are rushing to buy oil rather than anything else? What's your evidence for this?"
As I explained, the issue isn't that everyone is rushing to put their newly created dollars and euros into oil, and only oil. It is that the holders of oil (a commodity that is not perishable) are withholding from the market, i.e., reducing supply, of oil compared to what they might deliver if the dollars they received for it were 1) not being counterfeited by the currency's central bank at a massive rate, and 2) capable of being invested to produce a positive real rate of return.
To put it simply, which would you rather have, a barrel of oil or $100? The behavior of the Fed in printing money and keeping interest rates near zero is causing many oil producers to decide to keep the oil in the ground.
Rick T It is that the holders of oil (a commodity that is not perishable) are withholding from the market [because of expected/continuing devaluation of money]
I understand your reason and it sounds plausible; maybe I am not entirely sure why they ever sell their oil for dollars given that they think dollars are rubbish.
More important, however: wouldn't holders of oil also withhold it if they expected a future shortage of oil, for example if there is a threat of war in oil-producing regions? They expect a greater future dollar price, even without inflation of the money supply. So how do you know which of these reasons apllies now?
Macroman: Well, you never know for sure why anyone buys or sells something in the market. There are multiple reasons why people might buy or sell anything, and all one can do is try to figure out what are the most rational things guiding market participants.
To argue against my own proposition, if some people are buying oil, and suppliers withholding oil from the market, as you suggest, because they expect there to be a war in the Middle East that would severely contract supply, then even if the central banks of the world stopped counterfeiting their currencies and allowed interest rates to rise to whatever their natural rate might be, there would still be good reasons why oil prices would be high.
There is nothing one can do about war threats (other than discourage them) or the desire of oil consumers to build up an extra buffer to protect themselves if the worst happens. To the extent that the risk of war is something we can control, I hope we try to control it and are successful, but to some extent it is out of our hands.
Still, one thing that is within our control is the behavior of the Fed. And its policies of wild money printing and keeping interest rates at zero couldn't possibly be better crafted to encourage holders of valuable, non-perishable commodities such as oil to withhold supplies from the market, other than what they have to sell to pay their bills.
To some extent the Arab Spring turmoil has increased the demands on oil producing countries to produce and sell more to have the cash to pay off and subsidize their restive populations. Had they had a more quiet population, the oil producing countries would have pumped and sold even less, because, with the dollar and other fiat currencies being churned out at a spectacular pace, and the central banks making sure than any excess currency balances earn next to nothing, there is absolutely zero incentive for anyone who has oil and doesn't need immediate cash to sell any of it. That is what is happening now, over and above any inventory building or reduction as the threat of war waxes and wanes.
I'm afraid we'll never convince the average person of the truth on the speculation issue. Thanks for trying though.
Daniel I'm afraid we'll never convince the average person of the truth on the speculation issue.
You are probably right, but it would help if you said what the truth on the speculation issue is.
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