On my last post regarding the strange coincidence of the rise of the price of WTI crude and the Fed providing its blessing for regulated banks to engage in physical commodities trading, a comment was left by H_WASSHOI with just this link to a paper by Paul Krugman regarding the oil crisis in the ‘70s.
Regarding the paper by Krugman, it is likely out of context to assume that one oil shock is the same as any other. I am aware of the oil embargo, and how it ended up hurting OPEC because of the opportunity cost involved. Sure, it has the ability to deliver short-term pain, but the long-run pain is reflective as markets adjust. The saturation of natural gas heating prior to the embargo vs. after is informative to the possible opportunity cost of the embargo.
I don’t mean to neglect any possible contribution by OPEC to the 2000s oil shocks. I just do not wish to take it for granted, never having seen convincing evidence of causality regarding those particular shocks. An oil embargo is a rather obvious constriction of supply, while nothing so obvious occurred in the 2000s with many more suppliers in the oil market than what existed in the 1970s. There is reason for at least some doubt as to where the “market” failure occurred, as there are many possible suspects including the 2003 decision to allow regulated banks into the business of storing and transporting crude. These banks truly are monstrosities, quasi-government sponsored enterprises, like kept women of the government; nothing that would survive in a purely free market environment. The power they wield is enormous.
Additionally, the latter portion of the Krugman analysis, the meandering discussion of the cause of the Asian financial crisis as being related to multiple equilibria lacks credibility, at least from my point of view. Financial crises don’t just come out of nowhere; they are always and everywhere a monetary phenomenon.