ENN
Over the past eighteen months, oil prices have more than doubled, inflicting huge costs on the global economy. Strong global demand, owing to emerging economies like China, has undoubtedly fueled some of the price increase. But the scale of the price spike exceeds normal demand and supply factors, pointing to the role of speculation—and underscoring the need for policy action to clean up the oil market. Reflecting their faith in markets, most economists dismiss the idea that speculation is responsible for the price rise. If speculation were really the cause, they argue, there should be an increase in oil inventories, because higher prices would reduce consumption, forcing speculators to accumulate oil. The fact that inventories have not risen supposedly exonerates oil speculators.
But the picture is far more complicated, because oil demand is extremely price insensitive. In the short run, it is technically difficult to adjust consumption. For instance, the fuel efficiency of every automobile and truck is fixed, and most travel is nondiscretionary. Though higher airline ticket prices may reduce purchases, airlines reduce oil consumption only when they cancel flights. This illustrates a fundamental point: In the short run, reduced economic activity is the principle way of lowering oil demand. Thus, absent a recession, demand has remained largely unchanged over the past year. More
Sphere: Related ContentTags: economists, Oil Barons, oil inventories, speculation
June 29th, 2008 at 12:05 pm
This doesn’t seem to me to be likely to have any real effect:
If people would stop filling up and instead make do with half a tank, they would immediately lower gasoline demand. Given lack of storage capacity, this could quickly lower prices and burn speculators.
Assuming that a vast majority of Americans could and would participate in such an action (which seems to be right up there with the likelihood of me being beamed up to the Mother Ship in time for lunch), the effect would be so short-lived as to be insignificant. Consumption wouldn’t change appreciably, just as a 24 hour suspension of ALL consumption would have little or no lasting effect.
June 29th, 2008 at 12:26 pm
It may only have an effect presuming the price of oil is truly driven primarily by speculators. In the eighties, do you recall the energy fiasco in California where prices were driven through the roof from unregulated speculation?