The situation for oil is more complex, but the outcome for prices is potentially more favorable.
Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise.
There are of course considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner’s decision – and therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a role. But the fundamental insight is that owners of oil will adjust their production and inventories until the price of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to rise faster, they’ll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds.
…Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today’s price of oil with policies that will have their physical impact on oil demand or supply only in the future.
For example, increases in government subsidies to develop technology that will make future cars more efficient, or tighter standards that gradually improve the gas mileage of the stock of cars, would lower the future demand for oil and therefore the price of oil today.
Similarly, increasing the expected future supply of oil would also reduce today’s price. That fall in the current price would induce an immediate rise in oil consumption that would be matched by an increase in supply from the OPEC producers and others with some current excess capacity or available inventories.
Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.
Archive for the 'Economics' Category
Here’s another example of innovation - brilliant. Want to know the contents of every US-arriving shipping container?
…The latest: importgenius.com, the brainchild of brothers Ryan and David Petersen, with Michael Kanko. They exploit customs reporting obligations and Freedom of Information requests to organize and publish — in real-time — the contents of every shipping container entering the United States.
There’s a neat ticker on the bottom of their page showing a trickle of these data. Watch it for a few minutes: it’s mesmerizing and provides a sometimes beautiful window into the wonders of international trade.
How might these data be useful to firms? Well here’s an example: On May 23, Ryan identified a spike in imports of a new type of device from Apple, leading him to (correctly) predict the arrival of the new iPhone. Apple’s secrecy throughout its supply chain is legendary, but not even Steve Jobs dares lie to U.S. customs.
More from the Freakonomics blog.
Just an excerpt from Tyler Cowen — recommended and resource rich:
7. The bottom line is that when it comes to the key substantive questions about the oil market - why are prices so high — the correct answer is the Lachmannian one: “expectations.” If you push one step further on that, and try to evaluate or “source” those expectations, the correct answer is “we don’t know.” Jim Hamilton hints at some of this — and the imprecision of the “inventories” term — in this insightful post.
In the wake of the floods that have devastated Midwestern America, a recent CNN headline read “Insurance not required, FEMA told flooded town.” Long story short, a number of people blame the government for their failure to insure their homes against floods because the government did not require them to do so. They “said they felt misled about the risks of not having flood insurance,” and thought that the risks were “miscalculated.” As a result, legislation is now being introduced to require that all people living in levee-protected areas have flood insurance.
The problem here is not that FEMA did a bad job or that the levees were improperly built. They were designed to withstand a hundred-year flood, and this one was simply bigger than that. There is no reason to think that the risks were miscalculated; even events with very small probabilities will happen sometimes. No, the problem is much deeper. The problem is that people are relying on the government to make their decisions for them; they live in a levee-protected town, but will only make the decision to buy flood insurance if the government tells them that they absolutely must do so.
This psychology of dependency, in which “the government” is responsible for anything bad that happens, is one of the most insidious results of a big government. If people did not expect the government to have full knowledge of possible disasters, perhaps more than 28 of the families in the flood zone would have taken the responsibility on themselves…
This week the Wall Street Journal published one of the best stories ever about how inconvenient political correctness and green living can be. Both US parties will try to host “green conventions,” with the Democrats going to the extreme.
Some examples:
- Union-labour and American made organic cotton caps, shirts, and fanny packs.
- Bio-degradable balloons.
- A rubbish brigade that will look to see that convention goers put recyclable rubbish in one bin and non-recyclable rubbish in another. After, the brigade will look through each bin to ensure no mistakes were made. “That’s the only way to make sure it’s pure,” Andrea Robinson, a convention organizer says.
- Food will be locally grown to minimize emissions from transportation.
Is this what is in store for the nation if the Democrats have their way? So many people accuse the neo-Cons of using fear to get what they want. How is the green madness movement any different?
We need to recognize a few things. Life expectancy is at an all time high. We live better and wealthier lives with much a higher standard of living than ever. We can communicate with people instantly around the world and travel to every corner of the earth.
Technology and modern living carry trade-offs, but we are better off for it. If patronising only domestic goods made by union-labour with organic materials is the model of the future, the third world can kiss an prospect of future prosperity good-bye, and the first world will slip toward economic mediocrity.
This is a bit of a heads-up from Greg Mankiw — describing the Manhattan liberals’ dream endstate, where bureaucrats like Cahill control your life:
The town I live in (Wellesley, MA) wants to build a new high school, and the State Treasurer Tim Cahill objects to the cost. The state government is providing some funding, as it typically does for school building projects, but the town is willing to fully fund the incremental cost of all the bells and whistles that Mr Cahill objects to.
Why, you might ask, is the cost of these add-ons a state issue at all? Why not let local residents decide what kind of high school to buy? According to the Boston Globe, Mr Cahill explains his position as follows:
One community should not be able to provide better opportunities for kids versus another community just because they have the money.
In essence, Mr Cahill does not want the residents of Wellesley–a group with higher-than-average income–to spend their own money on their children. I suppose it is better for them to buy fancier cars or spend more on dinners out at tony restaurants. But better school facilities? Absolutely not!
Mr Cahill’s one-size-fits-all principle has many implications. For example, why should wealthier parents be allowed to hire tutors for their kids? Or give them private music lessons? Or send them to pricey summer camps? If Mr Cahill thinks that people should not be able to spend their own money to improve the lives of their children, the Wellesley High School is only the first step of a much larger project.
Sen. Barack Obama has a bad idea for “extending the life of Social Security.” He has proposed applying the Social Security tax to incomes above $250,000, in addition to the current tax on incomes up to $102,000. It’s unfair, he explained, for middle-class earners to pay Social Security tax on “every dime they make” while the very rich pay on “only a very small percentage of their income.”
Reporters cited the Obama statement without asking for the logic behind having someone making $100,000 pay on every dime and someone making $250,000 pay on just 41% of income, while someone making $10,000,000 would pay on 98.5% of income. There is no economic principle or theory of tax law that would endorse such a result.
Sen. Obama’s logic is fairly obvious, although it hardly makes him an exemplar of the “new politics.” The $100,000 to $250,000 group is a targeted voter demographic, and he really didn’t want to sock them with a 12.4 percentage point hike in their tax rate. But, as Sen. Obama himself noted in his June 13 announcement, just 3% of workers make more than a quarter-million.
More from Larry Lindsey.
From J.T. Young. Note: These numbers, originally from CBO, include all federal taxes.
Former Fed vice chairman Alan S. Blinder examines proposed Fed responses to bubbles. Prof. Blinder distinguishes banking-caused bubbles from other types, such as the tech-stock bubble. Blinder concludes
There are two main conclusions: First, when bubbles are not based on bank lending, the mop-up-after strategy still looks pretty good. When it comes to bank-centered bubbles, however, there are many more things that a central bank can and should do. But raising interest rates to burst the bubble is probably not one of them.
Excellent.
An income tax discourages work; a carbon tax discourages pollution. Which one makes more sense to you?
That is the most concise argument for the revenue-neutral carbon tax.
…But I digress. The point of this column is that are still a lot more shoes to drop as the result of high oil prices. We’ve only seen the first wave of behavioral changes. If gas prices stay high — and I have every reason to believe they will — then we can expect a series of other social changes that are less obvious and longer term.
Economists speak about the “short run” and the “long run.” Believe it or not, these are actually technical terms. In the “short run,” many factors of production are fixed, meaning that individuals and firms can only modify their behavior in some ways. A person can start taking the train to work in the short run, for example, but he can’t easily sell his house and buy a smaller condominium with a shorter commute.
In the “long run”, everything is up for grabs — where we live, how we live, how we get around, and even where we go. Smart folks ought to start thinking about what happens when energy prices are four or five times what they’ve been for most of the automobile age. It’s not rocket science: Prices go up, and rational people and firms try to avoid those higher costs.
More from economist Charles Wheelan.
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