What? Krugman wrong? oh boy, you're going to get it for pointing this out. Have you read his op-ed for today?

I am quite certain that it was a combination of relatively thin marginal supply (vs demand) and speculation, myself.

(These are the same conditions that applied in California when it got Enron'ed.)

The news story completely missed the point.

Supply and demand? That doesn't properly describe oil. It's really extraction and demand. Our oil supply (unlike, say, wheat) is finite. And in 2005, we've extracted 1/2 of it from the ground -- and remember that's the easy half.

This fact of peak oil is nowhere folded into this story. Yes, it's true that hedge fund owners speculated in the price -- known at the time -- and it's also true that when the market came crashing down, margin calls forced the price to come crashing down.

However: economists know nothing of how the price of a truly finite commodity will be determined especially with a growing need. With the growing human population, world-wide demand is going up (even if, say, in the US per capita demand is going down... for a short period of time). The bumps and wiggles on the price look large for us, but you have to take the big picture into view. (Look here to see the last few years included.) Since the 19th century, the price of oil is relatively constant -- because there was "plenty of it". Except for the blip in the 70's due to OPEC cutback and the fact that the US was no longer the swing producer the price spiked until the Alaska Pipeline and the North Sea oil fields stabilized things.

What is missing in that story is that sometime in 2007-2008 Saudia Arabia was no longer the swing producer -- that role went to... Russia. Scared yet? If not, read how Putin quickly tried to wield petroterrorism on Europe as soon as it happened.

On top of this, oil is priced in dollars and dollars are based on trust (other governments trust us to pay off our debt). So, you also need to fold into this story: what is the value of the thing that oil is being priced in?

Finally, the subtle implication in the story is that markets are efficient on a day-to-day basis. This isn't true at all as most people know (if it were, it's wouldn't be possible to get a stock at a good price). All investment in the stock market is speculative. It's not the wiggles in the market that count -- it's the long term trend.

Now that we are peaking in our world wide reserves and start the slide down the other side, it's possible for the "butterfly effect" to take hold in the price of oil. But expect to see it continue to rise in the longer term. As soon as our economy starts rolling again, for example, the price will jump. When that happens, the economy will take another hit, etc.

It's going to be a very rough ride but whatever the ride, the ending will be the same: control of oil resources will be the major factor in geopolitics -- and the price will continue to rise painfully.

I'm just waiting for everyone who bought the "ethanol plants drove global food prices through the roof" line to start with their apologies. The prices of 100+ food commodities rose (including fish and rice), and somehow a few dozen ethanol plants were to blame?

And no one smelled that there might be some self-interested parties who wanted to push this story? Sheesh.

As for oil, ct states it simply, above. Supply and demand WERE tighter, and there was enormous speculation (along with other factors, such as currency swings.) Might supply and demand grow tight in the future? Ask China.

Oh for the love of God!!! Get real!!!

If there were such a thing as an omnipotent economist he'd never be writing in the NYT or accepting Nobel prizes. He'd be anonymously sequestered in some undisclosed location being paid bazillions by his mega-rich benefactors. We'd all marvel at how the hedge funds paying this genius always turn higher profits (beginning to sound familiar and a little nauseating).

Has Paul Krugman ever been wrong? Gee, I don't know, is he published in the Times and donning white-tie in Stockholm?

The guy is just a smart, well spoken expert on economics, especially of the Keynsian sort. Hardly an oracle or fortune teller. Take a listen to what he says, along with other smart well-spoken experts, and draw your own conclusions. Seems like the direction the president-elect is taking.

Turn this into religion and we can all guess where the discussion is headed.

unless speculators were holding oil "off the market" they couldn't affect prices

Is Krugman going to argue that there's 2/3 less oil demand than there was 6 months ago and that the precipitous drop started happening exactly at the same time that the Wall Street banks collapsed?

Uh... price does not generally vary linearly with demand.

If demand increases above supply (or supply drops below demand), then prices rise until demand drops enough or supply rises enough so that they match each other. The opposite happends when demand decreases below supply (or supply increases above demand).

If there is limited ability to alter consumption or production to reflect price changes (or if it is difficult to alter such behavior in the short-term), then price spikes and drops will be greater, because behavior will not adjust to an equilibrium state without a greater incentive.