Time Magazine: oil not subject to laws of economics
Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up?
Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don’t always apply to oil prices.
Pretty strong statement, there. It is true that oil is less elastic than many other goods – that is, demand changes much slower relative to prices than, say, movie rentals.
But supply and demand not applying? At all? Even just sometimes?
Surely there will be further explanation in the article. Let’s look…oh, right here, second half of the first paragraph:
Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year.
There, see? They’re hoarding supplies…
…oh, wait…you mean those supplies aren’t reaching the market. Meaning the supply available is curtailed, which, economic laws state, will tend to increase prices.
Huh. Well, let’s move on:
Oil analysts believe OPEC’s decisions on Thursday [to not increase their output] could help push oil prices even higher; oil futures on the New York Mercantile Exchange have risen 36% in just two months…
Ah. So. Amid a tightening of supply in the actual market, no action to increase supply equals speculation that brings about price increases.
Sorry, I’m just not seeing how this is avoiding the Laws of Supply and Demand.
More tidbits from the article:
- …investors and oil producers are betting that global demand will roar back…
- Over the past two months, investors have plowed billions of dollars into oil futures.
- …the recession has prompted producer nations to freeze hundreds of projects to open new oil wells or upgrade existing ones.
- In the oil-rich Niger Delta, a major Nigerian government offensive against rebels has seriously disrupted production for several weeks.
In order: expectation of increased demand; increased demand for futures; restriction of supply; more restriction of supply.
Okay, all of you who took basic economics in high school: what do the laws of economics say about those factors?
They say whoever wrote that article doesn’t understand basic economics.
Comments are closed.
Another element or two for the fire:
- Full-to-the-brim tankers storing oil rather than transporting it to market reduce the ability of those who actually want to sell the oil to get it to market, and simultaneously increases the cost of getting said oil to market.
- Demand is already increasing, especially in Asia.
Since we’re still at the extreme-high end of the demand/supply price curve, a minor increase in the demand or a minor decrease in the supply (or both) will shoot the price right back to the stratosphere.
All true, but I was only using the S&D evidence that the author herself cited. AFTER the author said it doesn’t always apply.
Those examples were also from the article (though I did add the explanation for the use of tankers as storage facilities rather than transports).
Ah, I must have missed that part. Too much reading comprehension gives me gas.
I think you missed the point of the TIME article. As your article shows, the correlation between supply and demand exist with a commodity like oil. But TIME was pointing out that the supply of oil can be distorted by OPEC, which leads to distortions in demand.
This occurs specifically because the easiest and cheapest oil wells aren’t being drilled. In a normal market, this would not be the case. The distortion occurs because OPEC controls those wells. As such, they can control global oil output, which forces countries like Russia and the US to drill in less accessible oil beds first. OPEC is able to balance the market as they see fit – they can shrink supply to make a quick buck, they can flood the supply to make oil artificially cheaper and kill the viability of alternatives,
The author was pointing out that the oil market is heavily distorted. There’s no question that a supply and demand correlation still apply.