Krugman writes here on why speculation is not driving higher oil prices and offers a simple model here. I agree with Krugman’s conclusion but not his reasoning. Arnold Kling responds here and basically Arnold is right although his #2 on the Hotelling principle is trickier than his exposition indicates. The key two points in response to Krugman are: a) oil in the ground can substitute for inventories and thus speculation can be driving prices higher without it showing up in measured inventories; here’s that reasoning in more detail, and b) when risk and liquidity premia are changing, the relationship between the spot price and futures price is obscure and difficult to interpret. In particular a futures price for oil below the spot price does not refute the speculation hypothesis or even provide much evidence against it.
The more general point is that if a bubble, or lack thereof, could be read so easily from the available numbers, bubbles would be scarcer than they are. There’s also a tricky problem in defining a bubble when there is two-way feedback across price and expectations and "fundamental value" at any one point in time itself depends on the marginal unit of supply and thus it depends supplier decisions and expectations.
My apologies to those whom I am exasperating.
If Krugman’s cited data don’t do the trick, why do I agree with his conclusion that speculation is not the villain? The simplest alternative story, again blogged by Arnold, is that the earlier low price of oil was an anti-bubble of sorts and one which now has been corrected by market forces. It was a kind of collective blindness, akin to the view that real estate prices would continue rising in value. No, I can’t prove that is true but I find it the most plausible story, with p (truth) = 0.57.
Addendum: Note that most asset bubbles are based on the psychological property that bullishness is more common than bearishness in asset markets, if only for ESS reasons. This same general bullishness can drive "anti-bubbles" or artificially low prices in oil markets (high oil prices are bad for good times) even though yes I know that sounds funny and we are used to bubbles bringing artificially high prices.
Second addendum: Paul Krugman responds.