More dueling analysts
Paul Krugman says that the stratospheric price of oil is based on fundamentals, and that we would know it is not if, among other things, there were hoarding. Oddly enough, there is in fact some evidence of hoarding, about which Mr. Krugman appears unaware.
The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.
But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.
Meanwhile, Barton Biggs (who is often a little early on things) says that oil is in a “manic” period and that an interesting trade is to go long the financials and go short “energy and the whole materials sector.” Who is right? We don’t know.