This is an article featured in today's Straits Times, taken from the New York Times.
http://www.nytimes.com/2008/05/12/opinion/12krugman.html
Essentially, Prof Paul Krugman is saying that it is not "speculators" (people who quickly buy and sell) who cause the price of oil to increase, but it's the simple fundamentals of demand and supply that have caused the oil price to increase.
Specifically, he mentions that it is "the growing difficulty of finding oil and the rapid growth of emerging economies like China".
"The growing difficulty of finding oil" indicates a supply shortage - a decrease in supply (supply curve shifts leftwards)
"The rapid growth of emerging economies like China" results in an increase in demand (demand curve shifts rightwards)
And we know that although the change to the new equilibrium quantity of oil is indeterminate (may increase, decrease, or remain unchanged), the new equilibrium price of oil will definitely be higher.
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I have read some news saying that Nigeria oil pipeline was destroyed by the terrorist and adding to that is that Venezuela president Hugo Chávez is cutting exports in their oil supply.
But I think that institutional investor like hedge fund are also playing a huge role in the commodities markets as the falling stock market cause investor especially institutional investor to liquidate the stocks position and invest or speculate the oil markets through the use of oil deriavatives, especially the hedge funds which use oil to hedge other financial instruments. Considering that billions of dollar that will be injected into the oil market by investor, the demand utimately will rise.
As gold loses its value due to the bubble, many investor are also turning their attention to oil and food.
Matthew Tan Eng Yeow DBF 03
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