Left Flank

Thomas Palley makes a case that higher fuel prices are a result of speculation.

Whereas many oil market participants have blamed speculation, most economists defend how oil markets have performed and point to economic fundamentals. One argument that economists use is that higher prices are due to the weak dollar. Because oil is priced in dollars, a weak dollar makes oil cheaper to users in other countries, which increases global demand.

A second argument is that higher oil prices are due to lower interest rates and anticipations of higher long-term prices. That supposedly reduced supply by encouraging producers to store oil in the ground and pump it later.

A third argument is that if speculation were to blame for price increases, there should have been an increase in oil inventories, because speculators do not consume oil but instead store it for later sale. Since there has been no rise in inventories, there has been no speculation.

All three arguments are weak. The price of oil has risen far more than the dollar has fallen. That means that oil prices have increased in other countries, which should have reduced, not increased, demand. Moreover, it is high oil prices that weakened the dollar, not vice versa. This is because high oil prices raised inflation in the United States, worsened the US trade deficit, and increased the likelihood of a US recession by acting as a tax on consumer spending.

Nor have there been any reports of unusual production cutbacks - the linchpin of the second argument. Indeed, the spike in oil prices actually gives independent producers an incentive to boost production. The last time real oil prices reached current levels was 1980, which shows that hoarding oil in the ground can be bad business. OPEC also has a strong interest in maintaining production. It wants to keep prices lower to maintain the global economy's oil addiction and deter technological substitution of alternative energy sources.

Finally, the storage argument fails to recognize different types of inventory. Thus, record-high speculative prices have likely caused bunker traders to release inventory, but those releases may have been purchased by speculators who are now active lessees of commercial storage capacity. The implication is that speculators can drive up prices and increase their inventory holdings even as total commercial inventories remain little changed.

Additionally, oil market speculation may have induced «echo speculation», whereby ultimate users buy refined products in advance to protect against future price hikes. They then take delivery on their premises so that overall refined inventories rise, but that increase is not part of reported commercial inventories.

oil, speculation

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Comparing The Economist's less diplomatic opinion of President Lee Myung-bak with immediate reactions highlights what those snap judgments slighted.

The president, elected last December, has made a poor start to his five-year term.

Mr Lee, cleared this month of any wrongdoing in a failed investment scheme, nevertheless faces public suspicion over the past business dealings that made him a multimillionaire. And some of his nominees for cabinet posts are already under clouds. Three of his ministerial choices—for sex equality, «unification» (ie, dealings with North Korea) and the environment—have resigned over criticism of their property dealings. This is a highly sensitive issue in Seoul, where many cannot afford to buy their own homes. Some of his nominees' children are foreign citizens. One was thus able to dodge the mandatory military service. This has raised hackles. Most South Koreans cannot afford to send their children abroad to acquire foreign passports.

Most economists think Mr Lee's bold promise of 7% annual growth is optimistic. His plan to build a canal system on the peninsula has united a coalition of civic and political groups in opposition. And his call for a «pragmatic not ideological'' relationship with North Korea has perturbed American leaders. In addition, Mr Lee has had to scale back his plans to trim the bureaucracy. Instead of 13 government ministries there will be 15, down from 18 under his predecessor, Roh Moo-hyun.

The president's difficulties are compounded by his shallow political base. In a pun on the name of a famous actress, South Koreans call it «Ko So Young». «Ko» refers to his alma mater, Korea University, which has supplied him with prospective ministers and aides; «So» to the church he attends; and «Young» to the south-east of the Korean peninsula, which voted for him in huge numbers largely because Mr Roh is widely loathed in the region.

Even within the GNP, Mr Lee has few allies. Party heavyweights have long viewed him as an upstart without their own conservative convictions.

Korea Report concurs with this perspective on Lee's ethically-challenged cabinet nominees. It's unfortunate, but ROK is a country tired with partisan fractiousness looking for leaders who aren't contemptuous of average South Koreans and the law.

The political storm surrounding Lee's nominees was triggered by a new law requiring high-ranking officials to disclose their personal assets. Declarations from the Cabinet nominees and data leaked to the media show that most of Lee's nominees owned two or more houses, some with extensive tracts of land suggesting that they may have been engaged in speculation.

Now, Lee's choice of Han Seung-soo for prime minister hangs by a thread, with the nominee wounded by allegations of property speculation and tax evasion. A parliamentary vote is scheduled Friday.

And on Wednesday, two Cabinet nominees withdrew just hours before what were expected to be deeply embarrassing parliamentary hearings on their appointments.

Park Eun-kyung, nominated for environment minister, stepped back after reports that she once sold property zoned as farmland to a developer.

To avoid speculation, South Korean law requires that such land be farmed at least 90 days a year. Park had never been a farmer.

Nam Joo-hong, a professor nominated to lead the ministry responsible for unification issues with North Korea, withdrew after reports that his wife owned a ginseng field north of Seoul worth $2.2 million. The revelation was a damaging blow to an appointment already in trouble because of Nam's fierce opposition to rapprochement with North Korea, and from news that his son had acquired U.S. residency, gaining an exception from compulsory military service.

Those pullouts followed Sunday's announcement by putative gender equality minister Lee Chun-ho that she was withdrawing her name because of questions about real estate speculation. She and her sons were found to own more than 40 properties across the country.

All three former nominees blamed the media and opposition parties for using South Koreans' suspicions about real estate to taint them with what they said were unfounded allegations.

There are some who would argue that these rescinded nominations are the result of substantive policy disagreements (for another view, read Seoul Searcher's "It Must Go"). Yet even if both pundits are correct about ideological differences over DPRK policy, that doesn't explain the fracas over the Gender Equality and Environment ministries. More constructively, Brendan Carr analyzes the causes for ROK's precious real estate.

So just to be conservative, let's say that W50 million accounts for the «extra construction cost» necessary to complete that 34-pyong apartment. Construction, then, takes us to just around W200 million. That's in no way a bargain, by the way—we're talking about a 900 sq. ft. box (and the basic fit-out is real crap, too). According to the math, the greatest contributor to the balance of the average apartment price is the cost of land. In an earlier Korea Law Blog entry (August of last year), I noted how Seoul apartments of the size we're talking about here sell for an average price of W570 million—this Maeil Kyungjae report says that price is comprised of W200 million for the apartment, W370 million for the minuscule slice of the land underlying the apartment tower.

Rot in, rot out.