Saturday, June 28, 2008

Two Words for Paul Krugman: Um, No.

I am usually in agreement with Paul Krugman's views, but not with this one:
What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore. 

You see, iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year. In particular, the price Chinese steel makers pay to Australian mines has just jumped 96 per cent. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.
If the emerging economies continue to grow at more or less the same pace as for the last two or three years (and, in fact, are even slowing down, like in the case of India), where is this alleged "growing demand" coming from?