Oil bubble? Or a systemic bubble?

Rolling Stone points out that “Oil is now worth half what it was worth three months ago.” and criticizes Paul Krugman for claiming that there was no bubble in oil prices.

Krugman’s fatal assumption seems to have been that “Faced with higher prices, drivers would cut back on their driving; homeowners would turn down their thermostats; owners of marginal oil wells would put them back into production.” This assumes that demand for oil is, in economic terms I remember from an Economics 1A class a very long time ago, elastic. It means that when a particular good or service is priced too high, consumers can and will cut back.

While consumption has indeed dropped, the Wall Street Journal seems to indicate that economic conditions have driven down demand rather than high prices. But before the crash, both oil and food prices were skyrocketing. Krugman, among others, blamed biofuels at least in part.

Certainly, the push for biofuels was certainly ill-considered; people can eat corn, but there are many other plant substances that could be made into fuel. But this kind of inflation, conveniently excluded from “core” inflation, is reminiscent of California’s electricity crisis that seemed to signal the dot-com crash in 2001. It is the kind of event that suggests we have pushed beyond the limits of sustainability.

It wasn’t an oil bubble we were seeing but a systemic bubble. While world leaders will soon convene to devise a “Bretton Woods II” to regulate the financial industry on an international scale, the BBC reports that President Bush reiterated “that any plan to re-think the mechanisms of the global financial system could not be allowed to undermine the free market.”

But the “free market” is only “free” if you are a wealthy investor, able to send your money anyplace in the world to get the best deal. Ordinary people continue to face geographic limitations. I can’t buy gas for 12 cents a gallon in Venezuela because I’m in California. But an industrialist can locate a factory in China or India or any place else in the world where (s)he can find the least restrictive regulations and the lowest labor costs. And I am supposed to accept lower wages in order to compete with the world.

That this so-called “free market” can be considered sustainable is fantasy thinking. It makes no sense. But this is the scam that has been perpetrated on people in the developed world while the rich have gotten dramatically richer.

This is the bubble that has popped. The credit freeze means consumers no longer have phony money to spend. It also means that businesses can’t buy inventory, make payrolls, or sell as many goods on credit. And the reality of declining incomes takes hold.

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