The Oil Nonbubble

In what must be his best New York Times editorial ever, Krugman debunks the myth of an oil bubble. We probably only get the privilege of receiving this column because, this time, the stance allows Krugman to attack what he perceives as "conservatives" -- and here I thought liberals had lined up against "rampant speculation" too; but whatever:

“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.”

...

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.

I'm with Krugman on this one: it is time to accept longer-term high oil prices. The shifts involved -- saving energy, cutting back on sprawl, and using mass transit -- are not really bad things at all. -apk