Greenspan and the speculators

Should we be grateful to hedge funds for high oil prices?

By Andrew Leonard

Published October 17, 2006 11:34PM (EDT)

The press did a great job of spreading the word about Alan Greenspan's comments last week that "the worst might be over" for the housing crisis. But it wasn't until I read the entire text of his live interview with former Fed economist Sherry Cooper that I saw his equally interesting insight into the run-up of energy prices over the last five years.

"Hedge funds and other private market players did us a great favor in buying oil contracts. Investors can only invest by buying inventories, so they buy from producers, and that means that those inventories are already committed and cannot be consumed. Record-high prices generate an increase in the growth of supply and a slowdown in the growth of demand. Higher crude prices have triggered an improvement in technology, both green technologies and better oil-related technologies."

Yay, speculation! So instead of worrying whether an out-of-control Amaranth should have been reined in by regulators before it lost billions betting on natural gas prices, we should be thanking Amaranth traders for all the good they did pumping up gas prices. Hedge fund greed will save the world! Never mind how spiking energy prices fuel inflation -- the price mechanism comes to the rescue.

Greenspan certainly doesn't seem to be speaking as carefully these days as he did when he ran the Federal Reserve. Or maybe he's just being a contrarian. But how exactly does this work? A permanent rise in energy prices would do a lot to encourage green technologies. But a rise pushed by speculation? Such bubbles are always doomed to pop. Swift declines almost always follow sharp rises, when the underlying propelling force is trader speculation. We've seen that demonstrated dramatically in the last few months, as oil prices have fallen from $74 to just under $60 a barrel.

What do you suppose that sharp drop is doing for green-tech business plans? Am I the only one who thinks that with every $5 drop in the price of crude, another few thousand fingers get pulled away from venture capitalist triggers?

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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