Saturday, June 07, 2008

Get Ready for the Oil-Price Drop

The world economy can't handle current energy prices, much less a big increase. Which in turn means that oil prices will fall.

When the price of anything gets unbearably high, it discourages demand. The resulting drop in sales, in turn, causes inventories to pile up and the price to come down. That has proven true of overpriced houses - and it will likewise prove true of overpriced oil.

~Alan Reynolds of the Cato Institute in the NY Post


At 6/07/2008 8:17 AM, Anonymous Anonymous said...

The problem with that theory is that demand already is dropping. At least in the developed world. Its place like China which are driving demand now. And they subsidize their fuel costs and just keep printing money to pay for the subsidies. This only causes further inflation. Its only when the Chinese remove these unsustainable subsidies then we might see prices drop. There have been signs that the Chinese have been moving in that direction recently. I just don't think they have the faith that the market and its people will adjust to the higher prices.

At 6/07/2008 10:50 AM, Anonymous Anonymous said...

They don't have to "print" money, Mac. They've got plenty of U.S. Dollars (oil is sold in Dollars.)

As the wave of realization as to the "finiteness" of oil washes over the world all classic economic theories of supply/demand will be carried out to sea.

This ain't wheat. You can't "Plant" a bigger crop next year. You have to "replace" it.

Look to "Whale Oil." It's not identical; but, it's similar.

Brace for violent price swings.

At 6/07/2008 3:32 PM, Anonymous Anonymous said...

"That has proven true of overpriced houses - and it will likewise prove true of overpriced oil."

False analogy.

If people could inhabit a house by only buying it, thigs woudl be different. The availability of alternatives, like renting or living with relatives makes this a very elastic market.

On the contrary, there is little alternative to oil.

Thus, Cato is thriving on false analogies.

At 6/07/2008 9:24 PM, Anonymous Anonymous said...

I prefer the Julian Simon explanation.

"Greater consumption due to increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen. That is, we need our problems, though this does not imply that we should purposely create additional problems for ourselves."

I can't find a source for the quote but it is widely atributed to Simon on various internet sites.


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