I really need an Economics category

Why prices rise (by Russell Roberts):

Steve Mufson at the Washington Post is bewitched, bothered, and bewildered about why oil prices keep rising. The headline:

Skyrocketing Oil Prices Stump Experts

The article begins:

Confused about oil prices? So are the experts.

Executives from the giant oil companies say it’s partly the fault of “speculators” or financial players. Key financial players say it’s really a question of limited supply and expanding global demand. Some members of Congress accuse the Organization of the Petroleum Exporting Countries for bottling up some of its production capacity. And OPEC blames speculators, wasteful U.S. consumers and feckless U.S. policy.

Almost everyone points at China’s growing appetite for fuel.

Whatever the causes, one of the most dizzying runs in the history of oil prices picked up pace yesterday — again — as crude oil prices jumped to settle at more than $133 a barrel, up $4.19 in one day, 18 percent so far this month and more than one-third so far this year.

Prices climbed even higher in late electronic trading.

After a few paragraphs explaining the impacts of the higher prices, the Post quotes an expert who does have a theory:

But the bigger question is: What has been driving the doubling of prices over the past year even as U.S. demand has stagnated and global output has continued without any major new disruption?

“The basic story that has brought oil from $20 to $130 dollars is that world demand is growing robustly when world supply is not,” argued Jeffrey Rubin, chief economist of CIBC World Markets. “As a result, we need ever-higher world oil prices to kill demand in the [industrialized countries], which is exactly what’s happening.”

While U.S. demand has leveled off, Rubin said, demand in China is growing at a 12 percent rate, more than the 8 percent rate he forecast. While the extra increase in China is probably because of short-term factors, such as the earthquake or hoarding by the government in preparation for the Olympics, Rubin said even the lower rate would keep world demand growing briskly.

Hmmm. Seems pretty straightforward, doesn’t it? Rubin doesn’t seem stumped. I’m not sure why this article was written. I think the author wants one reason. China. Speculation. Greed. (Or more accurately, an increase in greed.) But the simplest explanation is that world demand is growing briskly and world supply is not as responsive.

If we want low gas prices, we should lower the costs of exploration and refining. If lowering those costs has environmental costs you don’t like, stop complaining and get on your bicycle.

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2 Responses to I really need an Economics category

  1. Mojo says:

    We are still in the relatively inelastic range of the demand curve. You get gasoline up to $4.25/gallon in Houston, or $5/gallon in Los Angeles, and I’ll posit that you’ll see the beginnings of serious declines in consumption.

  2. Roy says:

    A couple of other major things will happen as the fuel supply/demand curve finds a new equilibrium point:
    1. People will be moving closer to where they work, so suburb housing prices will fall, while closer-in prices will rise
    2. Airline travel will drop, solving some airport congestion problems, and killing off some airlines

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