Speculators are Chasing the Oil Prices

     

NPR interviewed Haas Professor, Severin Borenstein who also heads the UC Energy Institute on whether the current high oil prices are driven by speculators.

Not everyone is convinced that speculators are to blame for rising oil prices. The Bush administration has downplayed their role. And Severin Borenstein, who heads the University of California Energy Institute, argues that speculators are chasing high prices, not causing them.

"There is no evidence that the current price of oil is being driven by speculators or hedge fund activity, or by anything else that's going on on the financial side," Borenstein said. "Every day, real supply and real demand are meeting in the physical oil market and trading at prices of $130 a barrel. It's hard to see how financial traders could be causing that to happen."

I tend to agree. Another logical reasoning against speculators was given by Krugman who said, "If it is speculation, then where is the inventory build up?."

If demand meets supply at a price then everything produced is consumed with no inventory. If the price is artificially driven up then the excess supply must show up as inventory. It is not.

On a side note for the class of 2010, I think Borenstein is teaching Microeconomics for two cohorts of the class of 2010. He is also the author of the Strategy game we played as part of MBA299.

—Rags

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