Oil speculations

Paul Krugman's economics editorials are usually good and his latest on the cause of high oil prices sounds good to me. He argues that speculation is a form of wagering that has limited impact on prices and that global demand is rising, etc.

"Why are politicians so eager to pin the blame for oil prices on speculators? Because it lets them believe that we don’t have to adapt to a world of expensive gas."

In addition to the global demand explanation, it could be as simple as this: imagine Firm A relies on a product from Firm B, but lacks real capital for payment and instead pays Firm B with stock in Firm A. The value of that stock declines and naturally Firm B wants more flesh, not just to keep up with current losses, but to compensate for declining holdings too. The US dollar is weak, US business is weak--what's a poor Saudi King to do?

It's possible in the short term that the issue of whether or not supplies are decreasing relative to demand is irrelevant as long as people think that's the case. Perhaps that explains the Saudi's thinking when they recently increased oil production? Their gamble seems to have paid off--they increased production and oil prices rose. It's certainly ironic to see peak oil proponents deride oil companies when the peak oil argument benefits oil producers so much.

The only thing I disagree with in the Krugman article is that "Regulating futures markets more tightly isn’t a bad idea..." It wouldn't matter. There could be no effort to regulate futures markets worldwide and increasing regulation in some markets would just shift trading to unregulated ones. How would the US dollar do in oil trading in regulated US/UK markets versus a less regulated one in Dubai? Do ya reckon the Chinese are wringing their hands over oil speculators? Just the opposite: the Hong Kong Mercantile Exchange will start selling oil futures next year.

I imagine oil bargaining between the US and OPEC is a lot friendlier than what is starting to heat up between Russia and the rest of Europe. It just occurred to me that I should have included something about Putin's strategic plans for Russia's fossil fuel wealth and Europe in the post about Russian oil. From Scott Horton, Harpers.org:

"Putin has an impressive, personal mastery of energy policy. Indeed, this has been a subject that has long captivated him. In St Petersburg, Putin did his kandidat nauk with his dissertation topic on the creation of a foreign policy for Russia which derived maximum benefit from Russia’s enormous oil and gas reserves, with a focus on the gas aspect. The dissertation argues that Russia’s gas resources and Middle Europe’s dramatic gas needs provide Russia with far more effective leverage with the Europeans than the military calculus of the late Soviet period."

What will Russia do when the Euro inevitably starts to slip?