The Bubble Is a Bubble After All, Paul: Bush Props Up the Price of Oil

I don't usually disagree with Paul Krugman's economic assessments but when I do it's normally because he's left something out. In his op-ed today, it's a beaut.

In the course of arguing why he thinks the "oil bubble" isn't a bubble at all but "the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China," one of his primary arguments against the bubble is:

the initial balance between supply and demand would be broken, replaced with a situation in which supply exceeded demand. This excess supply would, in turn, drive prices back down again — unless someone were willing to buy up the excess and take it off the market.

(emphasis added)

While not stating it explicitly, Krugman's unspoken assumption is that there isn't anyone willing to do that. Unfortunately, he's wrong. There is someone: George W Bush.

Bush has refused, despite repeated urging, to stop buying oil & gas for the National Reserve. He continues to stock the NR even though we have more oil in reserve than ever before in our history and even though we've had to pay the highest price for it in our history. In times past when the price of gas went too high, presidents (including Nixon and Clinton) have (first) stopped buying it for the NR and (second) released some of the Reserve to force the price of gas downward again or at least stabilize it.

Bush, the oil man, is doing neither of those things. Instead he buys and buys, paying higher and higher prices, and refuses to release any of it. It is a policy that would be considered insane anywhere else, and has puzzled a lot of otherwise intelligent people, but the answer is really pretty basic.

Krugman has missed this somehow, but Bush is single-handedly making his oil buddies richer and richer by being the key ingedient in maintaining an oil bubble: he'll buy all the excess at whatever outrageous price Exxon or Chevron (Girlfriend Condi was on the BOD of Chevron and has a tanker named after her, remember) wants to charge him (I mean, us) and take it off the market by sticking it in the Reserve.

Makes sense now, what he's doing, doesn't it?

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

Paul, your only mistake is in looking for "panic" buying. No, there isn't any. That's because the "physical hoarding" is being done calmly and in cold blood waaaay under the radar by an unscrupulous US president using taxpayer money to fund the largest stockpile of oil in the world with the easily identifiable purpose of keeping the profits of the oil industry in the stratosphere.

And he's still buying.