Arnold Kling  

The Latest Oil Shock

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According to James Hamilton,


The sustained run-up in oil prices has coincided with a large increase, not decrease, in world oil production. World oil production had previously fallen off in response to the lower demand brought about by the recession of 2001, a time when oil prices were soft as well. Oil prices then rebounded as the global economy recovered, with growth of both particularly impressive in 2004. It is clear that demand, not supply, has been the overall factor driving world oil prices over the past several years.

...The non-OECD countries combined account for 63% of the increase in global petroleum demand over the last two years.

...there is no missing the fact that east Asia is the place to watch for what's going to happen to oil prices over the next decade.


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COMMENTS (4 to date)
Lancelot Finn writes:

I always had the impression that the problem with the oil market is inelastic demand and supply, which causes small shifts in the demand curve to cause big price fluctuations.

If supply is more elastic than I thought, maybe the demand curve shifts more than I thought.

It's ironic that Saudi Arabia, a neo-medieval religious-fundamentalist monarchy, is in effect the global Federal Reserve of oil markets.

spencer writes:

If you look at real US oil imports -- the best measure of US marginal oil demand -- you find that it is much more volatile then the article implies. This data shows that after the 2000 downturn US demand remained flat for a couple of years as firms ran down inventories because they were afraid of being caught in a falling price environment with high costs inventories. So afer a couple of years of no growth in US real oil imports they exploded in 2004.

My experience over the years is that oil economists, analysts are very good on the supply side of the equation but very bad on the demand side because they just stick with the long run trend and ignore short run deviations from trend.

Tom Kaminski writes:

About ten percent of those who comment on the oil market mention the effect of the decline of the dollar on oil prices. The dollar's decline should have an uneven effect on oil prices worldwide, and so the "shock" should be different for different regions. I assume that Europe has felt it much less than the U.S. or China; that is, the euro buys a lot more dollars than it used to, so it also buys proportionately more oil. And since China has tied its currency to the dollar, it should be paying a high premium for imported oil. I wonder what the oil market looks like when all of these changes are factored in. tk

dsquared writes:

Tom has it right; about half of the increase is more expensive oil and the other half is less expensive dollars.

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