> I'll add one thought that keeps coming to me. If free markets reliably > regulate prices, how the heck did we have such a crazy spike in oil prices > recently?
It's rarely as simple as portrayed in economics 101, but this type of problem has been long known. I think that I learned about it with hog prices...the fact that there is a time constant between the price of hog bellies and the ability to add new hog bellies to the market. This leads to market volatility, since when prices are high, a lot of new little piglets are raised, causing an excess in supply, lowering prices, causing few piglets to be raised, causing a shortfall in supply, etc. Now, you might think that folks could see this and enough farmers would counter-trend in order always make money, and thus smooth things out. Indeed, the futures market was created to help with this, my father-in-law regularly sold future harvests on the futures market to lock in prices and to decrease fluctuation. It's really critical with oil, because bringing a new field on line can take 10 years. That means that folks have to guess what the prices will be in 5-10 years. I can't talk out of school, but it's fair to say that no-one would start oil fields expecting >100 dollar/barrel oil to work. The Saudi's prince's comment that the price needs to be in the 70-80 dollar/barrel range seems close to target. > Surely neither supply nor demand changed much in such a short > time. No, but when both are quite inelastic when it comes to prices, one can see wild swings. For example, back in '98, oil dipped below $10/barrel, while natural gas was flirting with $2.00. As a result, gas wells were considered worthless, and new oil production plans had to be profitable at $15/barrel over the long term. Since then, demand has taken off. Just look at the last few years, while prices have been rising rapidly. World demand was still growing, rising 4% between 2004 and 2007, during which time the average price rose . Even comparing the second quarter of 2008 to the second quarter of 2007, we see that the demand was still rising (only 0.4%, but that's when prices were spiking above to $140+/barrel. This shows how demand is insensitive to prices. It took a global recession to slow this down. And while the demand forecast for next year is fairly flat, if the world economy recovers in 2010, then oil demand will continue to go up. If oil stays below $60/barrel for a while, then some planned production will be postponed, and there will be another squeeze. Now, those aren't the only factors involved. The drop in the dollar was part of the rise in dollar oil prices (the rise in Euros was smaller), and herd mentality among traders contributed to the volatility. But, those who speculated on future rising prices got killed in the market, so they hurt themselves more than anyone. Oil is a funny thing; some fields in the Middle East can still produce at a cost of under $10/barrel, while the new US oil plays (like the subsalt Gulf of Mexico) require much higher oil prices to be at all profitable. Alternative energy is still more expensive, so with low oil prices, you can either kiss that goodbye or expect every country in the world to voluntarily >And I haven't seen anybody argue that any sort of government > intervention was responsible. I suspect that what we've seen in oil, > housing and other bubbles is that we have created a system that amplifies > fear and greed. The housing bubble was partially due to cash with no place to go. But, much of the excess in housing prices was deliberately caused by homeowners' votes against affordable housing in places like California. Why do you think that prices for comparable housing in LA are so much more than Houston or Dallas? Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
