Who Says What?

Michael Masters, a hedge fund manager, claims that speculation is the main cause of rising prices for oil and other raw materials. He presented charts to Congress depicting the growth of the oil futures market, where investors buy and sell promises to deliver oil at a later date. Apparently the increase in demand from institutional investors is almost equal to the increase in demand from China. Although economists scoffed at this presentation, many members of Congress agreed with it. The “blame the speculators” theory seems to have taken hold in politics. National Review adopted this theory years ago and had been blaming speculators for high oil prices since then. According to Masters, a return to inexpensive oil is within grasp. All Congress would have to do is pass legislation restricting speculation. Masters predicts that if speculation was eliminated, gas prices would fall by about 50%. Although Masters views are a bit extreme, it is true that in some cases speculation can indirectly raise prices and encourage producers to hold oil rather than sell it. It is hard to say if at present there is a speculation price boom; there are no signs for or against it.
At one point Krugman, the author of the article refers to the speculation price boom theory as “the bandwagon.” You can see group dynamics at work not only with the “bandwagon” congressmen, but also the speculators themselves. The speculators make an impact on oil prices collectively. Investment choices are no doubt influenced by those of peers and can catch on. You have to question whether the high demand in oil is a result or a cause of the speculators investments, and to what degree. Is there really a need to reserve large quantities of oil or is it just because everyone else seems to be doing so out of fear? A similar hesitancy can be applied when regarding Congress’s agreement with the speculation theory at this point. There is no conclusive evidence in favor of it, so why commit to it? Krugman suggests that it might be a convenient and comforting excuse for those in denial that oil prices are never going to decrease. It might also be what he said; the bandwagon. Groups tend to make decisions that individual members wouldn’t necessarily make. Belief in the speculation boom is convenient and increasingly popular. There is no distinction between the individual congressmen so no direct responsibility for agreeing one way or the other. Speculators are affecting each other’s choices and subsequently those of congress. It is as Krugman said, a bandwagon.
http://www.nytimes.com/2008/06/27/opinion/27krugman.html