Changing Expectations

[daveon]

Changing Expectations

Wonderful news!!!!  An economist explains why the price elasticity of oil is such that if we can drill for more and increase the supply the price will come down...

I often wonder how some of these economists handle the process of dressing in the morning, nor for that matter, the filtering of actually DATA in order to reach their conclusions.

As I said in the comments section.  This is excellent news.  I think while oil comes down in price I had better stock up on Tulip Bulbs and get the South Sea Company to ship them to me.  I've heard they can be sold for a fortune on this Internet thing with just a "website" - better buy into some radio advertising too...

There are so many books on bubbles and so much data it astounds me that apparently credible economists that people listen to still get taken in by them.

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Comments

[k6rfm.livejournal.com]

Do you really think the current oil price spike is a speculative bubble? In speculative bubbles, pretty much everybody trading the commodity is only buying it because they think they can sell it for more money in a little while. I think most people buying oil right now are burning it, not reselling it. I do believe the current prices are "irrationally" high and will come down, but I think Deffeyes' analogy to queuing systems with waiting times that go chaotic when close to capacity is a better model.

What I think is happening: we're close to the point where increasing the price doesn't create more supply, and we're not yet to the point where increasing the price reduces demand.

[daveon.livejournal.com]

My personal feeling is this is a speculative bubble and has been since the $100(ish) mark, probably before that actually. It will deflate but I really can't say where. I suspect that we could see $200 a barrel before common sense takes over.

Two things about this:

1. The rate of increase in price has been accelerating and I think we've got a sufficiently large number of speculators in the market who want to see if they can get trades at the $200 level that we might see that for no other reason than it could be done.

2. I think the demand is far less elastic than people assume. The point at which "increasing the price reduces demand" is a lot higher than a lot of people assume because we really have no alternative. We know that consumers can pay twice as much as they are currently paying and still live relatively normally because there is a whole industrialised continent doing just that already.

Put the two together and we've got a nice little mess on our hands.