Speculation Continued...

The debate over whether speculation is an important factor in oil markets continues. Here's a round up of today's debate (so far):

Jim Hamilton: How big a contribution could oil speculation be making?

I do believe that speculation has been another factor that contributed to recent high oil prices. However, a key element of the bubble story is that there needs to be a very limited response of quantity demanded to the price increases, which the most recent data persuade me is no longer the case. Some of the estimates I've been hearing of the size of the contribution speculation is currently making to the price are therefore difficult to defend. Here I explain why, essentially elaborating on Paul Krugman's theme.  ...

Arnold Kling: My Model of the Oil Market: Option Value

Near the end of a "tiny theoretical paper," Paul Krugman writes,

the actual data we have on crude oil don’t show the signatures of a market driven by speculative demand. Inventory data don’t show a big accumulation; and the market has mostly been in backwardation, not contango.

...My model of the oil market treats inventories and oil in the ground as the same. I don't care whether it is sitting in a storage tank or sitting under the Saudi sand--it's all part of the stock of oil. To look for shifts between under-sand oil and in-tank oil as evidence one way or the other on speculation does not strike me as compelling...

Arnold Kling: My Question for James Hamilton

...My question is: what were speculators thinking a year ago, when oil prices, including prices for futures contracts expiring in 2008, were substantially lower than spot prices are today? ...

If you believe Hamilton's view of fundamentals, and you believe my view that it's the job of speculators to anticipate fundamentals, then what you should blame speculators for is keeping prices too low in 2006 and 2007 (in fact, in all previous years).

That is, in fact, the most plausible story. But it could be that today's speculators have it wrong, and that today's futures price for June of 2009 over-estimates the realized spot price that we will observe then. And if speculators do have it wrong, I do not know where to look for evidence of that.

Tyler Cowen: Exasperating Paul Krugman

Krugman writes here on why speculation is not driving higher oil prices and offers a simple model here.  I agree with Krugman's conclusion but not his reasoning.  Arnold Kling responds here and basically Arnold is right...

Paul Krugman: Confusions about speculation

OK, Tyler Cowen weighs in — but I think that he partly misunderstands my point. ...

Also, I see that Arnold Kling has a question for Jim Hamilton. Here’s my answer...

In the stories where speculation is playing a large role, and storage somewhere (in ground or in tanks) occurs, how do you explain the large run up in, say, agricultural commodities which cannot be left "in the ground" until later? There's no evidence of substantial inventory accumulations for commodities generally. Perhaps Arnold and Tyler can explain this, but it seems problematic to me. And what about Krugman's point about iron, how is that explained?

If prices suddenly come crashing down and stabilize at a lower level, I'll change my mind (and Krugman's distinction in the post linked above between bubbles and speculation is important to keep in mind here), but for now I don't find the speculative bubble story as the most likely cause of (most of) the oil price run up, or the increase in the price of commodities more generally.