The Corner

Krugman is Right!

Yes, there are swipes and jibes here and there in his NYT piece today, some ill-judged, some unfair, and others, gasp, hurled at NR (and about which I couldn’t possibly comment), but in his key point, I think he’s right:

Right now, the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $4-a-gallon gas.

Back in May, Michael Masters, a hedge fund manager, made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials. He presented charts showing the growth of the oil futures market, in which investors buy and sell promises to deliver oil at a later date, and claimed that “the increase in demand from index speculators” — his term for institutional investors who buy commodity futures — “is almost equal to the increase in demand from China.”

Many economists scoffed: Mr. Masters was making the bizarre claim that betting on a higher price of oil — for that is what it means to buy a futures contract — is equivalent to actually burning the stuff.

But members of Congress liked what they heard, and since that testimony much of Capitol Hill has jumped on the blame-the-speculators bandwagon…Why are politicians so eager to pin the blame for oil prices on speculators?

Because it lets them believe that we don’t have to adapt to a world of expensive gas…One thing is clear: the hyperventilation over oil-market speculation is distracting us from the real issues. Regulating futures markets more tightly isn’t a bad idea, but it won’t bring back the days of cheap oil. Nothing will. Oil prices will fluctuate in the coming years — I wouldn’t be surprised if they slip for a while as consumers drive less, switch to more fuel-efficient cars, and so on — but the long-term trend is surely up. Most of the adjustment to higher oil prices will take place through private initiative, but the government can help the private sector in a variety of ways, such as helping develop alternative-energy technologies and new methods of conservation and expanding the availability of public transit.

To say that the long-term trend in the oil price is “surely” up is to go too far, but if I had to bet on it, it’s certainly the more likely direction. Professor Krugman is correct, to say that the prudent course, one way or another, is to understand that we will have to adapt, and the sooner that fact is faced the better. Gas tax holidays are not facing the fact, and nor is the failure to recognize that some of the crankier aspects of environmentalism are a luxury good that can no longer be afforded. Equally, while I agree that private initiative represents the best way to deal with the energy problem, Professor Krugman is also dead right to say that government has a role to play in this process. To disagree is fall into the trap of a market fundamentalism that is more cult than science. Krugman lists a few of the areas where government could help (FWIW I’d agree with them all), but what he doesn’t add is that government can also help by getting out of the way. It can help, for example, by putting solar facilities ahead of the needs of the Mojave Ground Squirrel, it can help by opening up the offshore oil opportunity (and if, for political reasons, that has to end up by being via some sort of PSA mechanism, that’s fine), it can help by removing the brakes on oil shale/sands, well, you get the point: the list is as endless as the opportunity.

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