Krugman on the "oil bubble"

[depakid]

One of the curious things about economic debate in the later Bush years was the conviction among many on the right that there wasn’t a bubble in housing, but that there was one in oil.

We now know the truth about housing. But what about oil?

Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals.

And it also suggests that resource constraints will be an issue if and when we do get a full recovery.

http://krugman.blogs.nytimes.com/

[zipplewrath]

1. Unlike housing, oil volume can be throttled

Housing is not a consumed resource. Once a house is built, it's on the market. As such, when there is a bubble, it in effect hangs around a long time.

Oil bubbles on the other hand get consumed in the very short term. Oil production can be increased or decreased and within months the bubble will be gone. Even worse, bubbles in one extract, like aviation fuel, can cause effects on others like automobile fuel.

Depending upon what one considers a "full" recovery, pressure on oil prices will increase. It is why a continued focus on energy production is important. The country that has a reliable source of energy will have an advantage. One that has a reliable source of renewable energy will be even better off.

[Javaman]

4. That's why I take heed to the fact that the Saudis are building Solar fields.

the economy improves, the price of oil goes up, energy of any kind will be at a premium.

They know the good sweet oil is running out.

[Statistical]

2. The days of cheap oil are over. They are never coming back.

People, groups, countries that accept that hard reality and make plans to move off this increasingly expensive commodity will prosper. Those that don't will be crushed.

A decade ago China had a eligible amount of auto sales. This year China will pass the US. 20 million cars being added to the road every year.

Unlike the US most of these aren't replacement vehicles rather the size of auto fleet is growing by 20 million units per year. China oil consumption will skyrocket over next decade.

IMHO we could see $200 barrel oil on fundamentals and the associated $6 - $7 a gallon gasoline by the end of Obama second term.

We can accept the reality or we can pretend it doesn't exist but it is coming.

[Javaman]

5. It will be some interesting times then...

I will love to listen to how the repuke will spin the high price and how they plan to bring it down. LOL that will be rich, indeed.

The 2016 election will be one for the books, that is if there is enough power to still make books. ;)

[Viking12]

6. The RW spin will be

a) high prices are due environmental restrictions

b) low prices can be had if we only drill-baby-drill

[Javaman]

8. pretty much sums it up.

in other words, the gop then will be like the gop now. same song different year.

[phantom power]

3. Interesting, he seems to be making the 'cruel descending sawtooth of demand destruction' argument.

[bananas]

7. He links to a 2005 prediction by Forbes of 35-40 $/barrel

Krugman's article is at http://krugman.blogs.nytimes.com/2010/02/22/the-oil-bubble-controversy-revisited/
He links to http://www.forbes.com/feeds/afx/2005/08/30/afx2195813.html

Oil price bubble about to burst, says business guru Forbes
08.30.2005, 05:20 AM

SYDNEY (AFX) - Oil prices are set to crash from this week's record highs as a speculative market bubble bursts with an impact that could make the hi-tech bust of 2000 'look like a picnic', business publisher Steve Forbes has predicted.

Forbes said the high oil prices currently dampening the US economy, which peaked at more than 70 usd a barrel yesterday as Hurricane Katrina headed for the US Gulf Coast, would fall to 30-35 usd a barrel within a year.

'I'll make a bold prediction... in 12 months, you're going to see oil down to 35-40 usd a barrel,' he said, according to Agence France-Presse.

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