Wednesday, July 16, 2008

Bernanke Defends Oil Speculators

Federal Reserve Chairman Ben Bernanke in testimony, yesterday, in his Semiannual Monetary Policy Report to the Congress before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate, defended oil speculators by saying:

Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term.

The only argument that critics have against this line of defense is that oil production may be down by oil producing countries because they are speculating on higher prices and are reducing short-term output, thus causing the decline in oil inventories. It does not appear on first glance that this is the case. But, Bob Murphy, senior economist at The Institute for Energy Research, informs me that he is doing some work on recent oil production levels and sales levels by oil producing countries. Once he's out with the numbers, I'll post them here at EPJ.

UPDATE: Bob Murphy just sent this email note over to me:

All I've got right now is the official EIA estimates, but if they're in the right direction then I think we can rule out supply cutbacks. Both OPEC and total world supply did fall ever so slightly from 2006> to 2007, but they're up sharply in first quarter 2008. So I don't think you can blame the huge run up in prices on "speculators pushed up futures prices so producers cut back" argument.

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