EC103-Topic #1: Supply and Demand for Oil

We have seen an unprecedented increase in oil prices which has affected not only the U.S. economy but other economies as well. Aplia’s economics blog recently contained a story describing how the market for oil takes into account expectations of the future. A recent post on the Freakonomics blog discusses the price of oil relative to the price of water. Both of these blogs should help you understand how the markets for oil work the way that they do.
In 2004, Ben Bernanke made a speech remarking the importance of oil in our economy, and how uncertainty plays such an important role in the price of oil. He discusses not only the current supply and demand for oil but also makes future predictions about the market. In 2008, Bernanke spoke again on oil, when prices for a barrel of oil were much higher than they are today. Many politicians have discussed plans to lower our dependence on oil in response to the higher prices of oil today. Although our economy has suffered due to high oil prices, other countries have been really successful in the oil industry such as Russia.

Questions you might try to answer:

• Given what has happened to oil prices over the past month, what do you believe will happen to economies that are dependent on revenues from oil?
• Do you believe speculation has played a major role in the price of oil and gasoline over the past year?
• What impact do you believe uncertainty in oil markets will have on our overall economy?
• Why do you believe oil prices have recently fallen so dramatically? Please explain.

I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

24 thoughts on “EC103-Topic #1: Supply and Demand for Oil”

  1. Oil prices are finally down; after hitting a staggering $145.29 a barrel in early July, $90 a barrel seems almost bearable. Analysts have gone nuts attempting to explain the steep decline, but I believe it might be an example of simple supply-and-demand. It may possible that people are finally consuming less oil.According to the Department of Energy, U.S. consumption of oil fell almost 800,000 barrels from 2007 to 2008. Whether for economic, environmental, or political reasons, we are using less oil. Americans are no longer willing to pay astronomical prices at the pump, and with less demand comes a lower price.The volatility of oil prices doesn’t allow for accurate forecasting, and as of today, the nationwide average gas price has actually risen 16 cents from last week due to Hurricane Ike shutting down many oil refineries on the Gulf Coast. But if uncertainty in both the oil markets and the global economy continues, my guess is that people – and nations – will continue to be conservative in their consumption. – Molly O’BrienThe NY Times: “Crude Oil Continues Decline” http://www.nytimes.com/2008/09/16/business/worldbusiness/16oil.html?ref=economyBloomberg: “Crude Oil Tumbles as Wall Street Turmoil Adds to Demand Concern” http://www.bloomberg.com/apps/news?pid=20601207&sid=aKKqiHI6m6wo&refer=energy

  2. Although the region affected by Hurricane Ike produces 20% of the nation’s oil, the damage done hardly affected the price of gasoline. There are different factors that contribute to the staggering oil prices. One of these factors: speculation. According to United Airlines, speculators buy large amounts of oil and continue to sell it to each other before it is actually used. Speculators buy these future shares hoping that the price of oil will continue to rise. In trading the oil to each other the price rises and who ends up with the extra charge…the consumers. Congress once regulated market speculation, however, Congress’ ability to regulate has been limited. Speculation has played a major role and will continue until Congress’ power is restored.- Carlos VillalobosRussell Roberts: “Oil Speculation”http://cafehayek.typepad.com/hayek/2008/07/oil-speculation.html

  3. With SUV driving Americans paying close to, and in some cases over, $100 at the pump it’s been months since anyone even entertained the idea of oil costing around $90 a barrel. But then again, it also seemed feasible to assume that it would be a long time before the dollar stood up to the Euro. For some, the wait may have seemed too long as many international celebrities, who were once paid in US dollars, have renegotiated their contracts to be paid in Euros. The price of crude oil and the strength of the dollar are closely linked due to the fact that oil is bought and sold internationally with the dollar. As the value of the dollar increases, the price of oil (per barrel) decreases. While the dollar starts its slow, and hopefully steady, rise in value Americans should see the price of oil dropping accordingly. Although the increased worth of the dollar has helped lower prices, another key factor in the shrinking oil prices is the demand, or lack there of. The demand for oil is considerably lower at this point in time than it was a year or two ago, and as a result has damaged the economy. It seems that an increase in demand will help strengthen the economy, but in doing so will have the potential to raise prices.Catherine Clifford: “Oil Prices Edge Lower”http://money.cnn.com/2008/09/03/markets/oil/

  4. Oil prices have fallen about 8.2%, or 33.7 cents per gallon, from the record high of $4.11 per gallon set on July 17, 2008. Current gas prices average around $3.77 per gallon. The most effective explanation of this sharp decline in oil prices can be provided by the supply and demand principle. Demand for oil has decreased, generating lower oil prices. Oil consumption has fallen 3 – 4% so far this year, by about 800,000 barrels of oil per day, the sharpest decline in oil consumption in the past 26 years. Overall, demand for oil has decreased by 40% from one year ago, according to the US Department of Energy. A leading explanation of the declining demand for oil is the rise in interest rates. Increased interest rates slow down the economy, and slow economic growth generates a decline in overall consumer demand. Current dramatic worries in the economic market hurts oil demand, resulting in current decreased oil prices.- Andrea TacconiUSA Today: “U.S. oil consumption down 800K barrels a day in first half of 2008”http://blogs.usatoday.com/ondeadline/2008/08/report-us-oil-c.htmlCNNMoney.com: “Gas prices sink for third day”http://money.cnn.com/2008/09/20/news/economy/gas_prices/index.htmThe New York Times: “Crude Oil Prices Rise Amid Dwindling Inventories”http://www.nytimes.com/2008/09/19/business/worldbusiness/19oil.html?ref=worldbusinessBoston.com: “Oil falls to near $100 a barrel”http://www.boston.com/business/articles/2008/09/11/oil_falls_to_near_100_a_barrel/Newsweek / The Washington Post: “Vague on Oil Prices”http://newsweek.washingtonpost.com/postglobal/energywire/2008/08/vague_on_oil_prices.html

  5. Speculation essentially controls the price we pay for oil, regardless of OPEC’s current price. “We believe that the market is in equilibrium…” said Libya’s oil minister Shukri Ghanem at a recent OPEC convention, “It is not a problem of supply.” Therefore, the rise in oil prices is due to speculation, made possible by a loosening in regulations over the last couple decades. Today, speculation investments consist of 66% of all oil futures contracts, a figure that rose from 21% in the late 80’s. Consequently, a barrel of oil may be traded up to 20 times before reaching the pumps, each time creeping up the supply curve and increasing in price. Several market experts have estimated an increased $30 to $60 in total oil price due to speculation. If true, this accounts for a significant portion of rising prices.U.S. Energy Secretary Samuel Bodman spoke on the contrary, “there is no evidence that we can find that speculators are driving futures prices.” However, this does mean there is no over-speculation; if oil speculators do have malicious intent in regards to their foresight, they are getting away with it. Perhaps the U.S. Commodity Futures Trading Commission needs to re-evaluate recent oil market trends and respectively tighten laws surrounding speculation. -Tanner KulbashianYPFP: “What is Causing Uncertainty in Oil Markets?” http://www.ypfp.org/what_is_causing_uncertainty_in_oil_marketsCafe Hayek: “Oil Speculation”http://cafehayek.typepad.com/hayek/2008/07/oil-speculation.html

  6. I believe that speculation, along with its inherent potential for uncertainty, has had a large impact on oil and gasoline prices this year. This, in turn, has decreased the spending power of large consumer groups, even affecting our overall economy. Oil speculation has long been a method that analysts and traders use to gauge the future price of oil, based mostly upon predicting a probable rise or fall in either oil supply or oil demand. This in turn, leads to a shift in current oil prices to prepare for their predictions- higher prices indicate an expected decrease in supply or increase in demand, while the inverse holds true for lower current oil prices. However, oil speculation is hardly fool-proof, and uncertainty within speculation can lead to potentially negative results on the economy as a whole. Nearly everyone, including large firms and individual workers, would be affected by unexpectedly high price changes in oil and gasoline from daily commutes to product manufacturing. With everyone paying substantially more for their daily necessities, it’ll come to affect other industries, such as clothing retailers, seeing as their customers are willing to spend less on their nonessential products. Until the government is able to reduce the impact and range of speculation by issuing trade regulations to major US-owned oil firms, the economy is bound to fare worse in the coming days.Engdahl, F. William. “Perhaps 60% of today’s oil price is pure speculation”. http://www.globalresearch.ca/index.php?context=va&aid=8878Fuller, Brandon. “Oil Prices and Expectations”. http://econblog.aplia.com/2008/07/oil-prices-and-expectations.html

  7. America like Japan are both developed countries, and although the American economy has taken a severe hit with high oil prices, Japan’s economy is relatively in a much more stable condition. The reason as S&P analyst Takahira Ogawa explains “the shift away from oil and [Japan’s] improved efficiency.” Japan’s technology and innovation has kept their supply and demand curves of oil reasonably stable thus not hitting Japan’s economy as bad as it does to America and other countries that are less prepared for high oil prices.The uncertainty of oil prices affects the economy’s health as citizens are wiser with their money choices. Japan isn’t as affected by changes in oil prices so the shift in supply is relatively smaller than in America. Because oil is a complement to many products in the economy (transportation, production), Japan’s increase prices for other goods is also relatively smaller than America’s. More extreme shifts in supply would therefore scare citizens to hold onto their money more in American than in Japan. These higher prices also make citizens have less purchasing power thus stimulating the economy less in America. Moving towards other energy resources or becoming more efficient seems to be ideal place to head.Man Ting KoPlatts Oilgram News: "Japan ready to weather oil price spike, says S&P"http://www.lexisnexis.com.lucy2.skidmore.edu:2048/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T4615025284&format=GNBFI&sort=DATE,A,H&startDocNo=1&resultsUrlKey=29_T4614983678&cisb=22_T4614983677&treeMax=true&treeWidth=0&csi=8046&docNo=2

  8. Oil Prices are at a considerably low price today at $90 a barrel compared to just a few months back in May when they were $122 a barrel. The prices at the pump are much lower however looking back just in 2003 the price for a barrel of crude oil was around $30 dollars. The price of gasoline is determined by an explanation between the relationship of supply and demand. As we seen over the past couple years there have been scares about the scarcity of oil. The supply has decrease causing the prices to increase sharply. However with supply comes demand. If demand decrease, the price will decrease. Demand has certainly decreased for oil in today’s society. This is due to the “green” movement and people buying more fuel efficient vehicles. Also people are not willing to pay as much at the pump so they are conserving travel. Brandon Fuller: “Oil Prices and Expectations”http://econblog.aplia.com/2008/07/oil-prices-and-expectations.htmlBen Bernanke: “Oil and the Economy”http://www.federalreserve.gov/Boarddocs/Speeches/2004/20041021/default.htm- Becca Ormsby

  9. It was a brutal summer in terms of oil prices, and everyone’s wallets are still feeling light. In costal Maine gas prices were nearly $4.30, and although that wasn’t nearly as high as prices elsewhere, say, California, it still did a toll to the amount of motoring tourists. Now, with oil prices down to a still pricey $90 a barrel, Americans are looking back only several years when oil was a mere $30, and asking: What happened? The answer is speculation. When these speculators look into the future, they try to guess whether or not oil will be hard to come by. Just by saying so, these men can make gas and oil prices skyrocket for no apparent reason. For example, at the end of the summer it was found that Swiss energy conglomerate Vitol was holding oil contracts to make a large profit, making the quantity demanded go up, resulting in high prices of oil. What really needs to happen to solve the money side of the oil issue is to somehow regulate and monitor the speculators so they are not pursuing a personal gain from the suffering of consumer’s wallets. Skip SuvaWashington Post: “A Few Speculators Dominate Vast Market for Oil Trading” http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898.html

  10. I think it is justified to say that the oil market is in need of a great reform. I propose that the WTO or some other international organization should impose a tax on trading oil and or oil futures. The idea resembles carbon trading in some respects. Basically, if we impose a tax on the trading of oil, people purchasing and selling oil will trade less. The idea is that each country forms strong political and economic relationship with countries that produce oil. And further, the trade of this oil between the distributor and the government of the consumer will become more direct and less expensive. If there are less middle men in the process of the oil getting from the distributor to the consumer the price will inevitably be less, and furthermore the quantity will be more. These ‘oil credits’ will of course not stop the flow of oil trading among middlemen to different countries, but it will decrease it. This argument to the solving the oil market ‘crisis’ is definitely just an opinion and could potentially lead to error. Tim Marsh

  11. With oil prices hitting a record high of $147.27 a barrel on July 11, Americans are starting to look at their use of oil through a more critical eye. When it costs over a hundred dollars to fill up one’s car at the gas station, people are realizing that the way we have been using gasoline for the past couple decades will not be financially sustainable for the future. Americans can’t afford to keep guzzling gas at the rate that they have been. Necessity is the mother of invention. As Oil consumers in the United States are realizing that they can’t afford wasteful use of gasoline, Americans are starting to look at more efficient and economical ways to approach our oil driven life styles. According to the Department of Energy, U.S. consumption of oil fell almost 800,000 barrels from 2007 to 2008. People are turning down SUVs for more eco-friendly forms of transportation such as hybrids and good old public transportation.The glimpse of high oil prices this summer will guide the future for American lifestyle, as the United States takes a turn to a more economical and efficient use of gasoline.-Sam BrownUSA Today: “U.S. oil consumption down 800K barrels a day in first half of 2008”http://blogs.usatoday.com/ondeadline/2008/08/report-us-oil-c.htmlMSNBC: “Crude oil rises above $100 a barrel”http://www.msnbc.msn.com/id/12400801/

  12. It appears the recent crisis regarding the prices of crude oil in the United States has been completely consumer imposed. When oil prices were low, consumers used far more oil than they do today. Similarly, the United States is currently undergoing a water shortage due to the same principle. Water consumers in Southern California pay approximately $3 for 750 gallons of water, leaving consumers completely unconcerned with how much water they use. Likewise, as people started to consume more of the cheap oil they were used to 10 years ago, the demand for oil inevitably increased. By the principle of supply and demand, higher demand leads to higher prices. Another example of consumer imposed pricing is speculation about oil pricing in the future. Speculation has a large impact on oil pricing because if an oil company believes demand for oil will increase, it is less likely to withdraw oil at the time, hoping to hold onto the oil until it becomes more valuable. If U.S. economists are somehow able to speculate lower prices, whether accurately or not, everyone will experience lower oil prices due to an increase in supply(because companies will withdraw more of their supply in an attempt to sell oil before the prices drop).Russell Roberts: “Oil Speculation”http://cafehayek.typepad.com/hayek/2008/07/oil-speculation.htmlDavid Zetland: “Oil and Water”http://freakonomics.blogs.nytimes.com/2008/09/11/oil-and-water-a-guest-post/-Peter Anderson

  13. cbThe current rise in oil prices stems from increased demand coupled with tightening oil supplies. While reckless oil speculation may seem to cause oil run-ups, speculation plays a minor, reflective role, rather than a causal role. As the world economy continues rapidly expanding, demand for rises, particularly in “developing and emerging market economies, where energy consumption has been further stimulated by rapid industrialization.” (1) In the last few years, though, oil production hasn’t matched the increased demand, rising slightly. The paltry growth in supply “reflects inadequate investment and production shortfalls [as well as] many governments tightening control over oil resources, impeding foreign investment and hindering efforts to boost capacity and production,” as well as drops in “sustainable rates of production” in typically secure, accessible oil fields. Speculation reflects the current shortage and tries to accurately project the long-term supply compared to expected demand. Speculators expect future shortages (and a rise in prices), and so future delivery of oil is expected to rise. “Seeing the high price for future oil delivery, oil producers hold back oil from today’s market” to stockpile for anticipated future sale (to offset higher future delivery costs). (2) This does increase today’s current price, but more accurately reflects the current supply and demand, and extrapolates from actual current levels to predict future prices. If the underlying demand weren’t largely outpacing oil production, speculators wouldn’t predict futures as such, and so “our best judgment is that this surge in prices has been driven predominantly by strong growth in the underlying demand and tight supply conditions in global oil markets.” (3)1 Ben Bernanke, Semiannual Monetary Policy Report to the Congress, 2008.2 Ben Bernanke, Lecture, Darton College 2004.3 Bernanke 2008.

  14. A Businessweek cover article from November 1997 entitled “The New Economics of Oil” writes that no matter the increase in demand for oil, prices will most likely stay relatively equal to the low $20 it cost at the time. This sounds incredible, because here we are now, a mere eleven years later yet a whopping 70 to 80 dollars more expensive per barrel.The article was based around the idea that technology is so rapidly improving that the amount of oil discovered and unearthed will increase so dramatically that prices would remain stable. It is true that technology has become terribly innovative; yet, oil is still so much more costly. Perhaps it is the technology itself that helps cause the increase in price. With the high cost of oil production, it often takes a very high selling price in order for a company to come out equal. For example, a March 2008 Arabian Business article notes that Venezuela needs prices to average $94 a barrel in order to “service its external accounts”. With the events of the past few weeks and the plummeting cost of a barrel of oil, economies dependent upon the revenues raised due to oil production will most likely suffer. OPEC has lowered its numbers for demand this year, and economies like Nigeria’s that earns about half of its GDP from oil production, will most likely see losses. Yet, perhaps the drop in prices, estimated to drop down to below $3.50 per gallon later this year, might end the current conservative nature of gasoline consumers, and eventually increase demand again.BBC: "Nigeria's economy dominated by oil"http://news.bbc.co.uk/1/hi/business/1763464.stmBusinessweek: "The New Economics of Oil"http://www.businessweek.com/1997/44/b3551001.htmThe NY Times: "Crude Oil Continues Decline"http://www.nytimes.com/2008/09/16/business/worldbusiness/16oil.html?_r=1&scp=1&sq=economies%20oil&st=cse&oref=slogin

  15. This summer, America witnessed an astonishing change in oil prices when the price of a barrel went from $90 to $140. Analysts from all over have tried to put their finger on what they believe is the root of the problem but I believe that the problem is simple supply and demand economics. The US United States geographically only has 2-3% of the world’s oil reserves while we consume 25% of the world’s oil. I believe that after five years of disarray and uncertainty with US consumers, people finally understand how significant this problem is and that they can help the problem by no longer “gouging” for oil. Hopefully, this can decrease the demand the US has put on international exporters for oil. In response to the decrease in demand, the world’s oil reserves will increase and prices will slowly fall back to equilibrium. -Harris BrettCommercial Appealhttp://www.commercialappeal.com/news/2008/sep/20/guest-column-why-is-gas-so-high-supply-and/Ashbury Park Press: http://www.app.com/apps/pbcs.dll/article?AID=/20080921/OPINION/809210322/1030/OPINION

  16. The amount of oil that is produced relates directly to the consumers’ expectations about future oil supplies. On the supply side, if the oil producers today believe that in the future oil prices will be higher, they will slow down their production in order to extract it at higher prices in the future, the more profitable move for them. On the demand side, if there is a decrease in the supply of oil due to expectations for the future but the demand remains constant due to a continued reliance on cars then the prices will increase as the supply cannot meet demand at the previous low price point. In the current market, however, the opposite situation is taking place as oil prices have dropped recently. According to Feldstein, a drop in current oil prices could possibly be explained by increasing the expected future supply of oil. Although this explanation is possible it is unlikely due to the constraints put on oil production due to the limited availability of oil in accessible places and political turmoil in the locations the U.S. currently uses for oil supplies. Furthermore, potential options for the future such as offshore drilling do not appear promising. “Even by 2030, offshore drilling would not have a significant impact on oil prices, according to Martin, because oil prices are determined on the global market.” ‘The amount of total production anticipated—around 200,000 barrels a day—would be less than 1 percent of the total projected international consumption.’” (Gertz). As a supply side change is unlikely given the current economy, more likely the shift in gas prices relates to a demand side change. This could be a positive sign for the U.S. economy if consumers are finally realizing the implications of depleting natural oil supplies and are looking towards alternative sources of energy to decrease their average oil consumption. Sources:Bernanke, Ben. “Oil and the Economy”.http://www.federalreserve.gov/Boarddocs/Speeches/2004Bernanke, Ben. “Semiannual Monetary Policy Report to the Congress”.http://www.federalreserve.gov/newsevents/testimony/bernanke20080715a.htmJuly 2008Fuller, Brandon. “Oil Prices and Expectations”.http://econblog.aplia.com/2008/07/oil-prices-and-expectations.htmlJuly 2008.Gertz, Emily. “Can Offshore Drilling Really Make the U.S. Oil Independent?”.http://www.sciam.com/article.cfm?id=can-offshore-drilling-make-us-independentSeptember 2008

  17. In the discussion of the economics of oil, a word that comes up frequently is volatile, which is used to describe the shifting and fluctuating nature of oil prices. Just this year, prices rose to a record high of just over $145 per barrel in July and then quickly fell to around $90. Even in the past several days, prices have risen again as the government prepares to intervene into the financial system of the United States.I believe that this constant rise and fall of prices cannot only be explained by supply and demand and that speculation has played a huge role in the recent price fluctuations. Due to the uncertainty global politics and how well the world’s oil supply will hold up, speculators can buy and hoard oil now, hoping to make a profit later if oil prices were to dramatically increase in the future. According to F. William Engdahl in his Global Research article, oil speculation and investment “has led to a situation where we have both high supplies of crude oil and high crude oil prices.”I would guess that the uncertainty of the oil market, the high prices caused by speculation, and the overall economic slump would cause Americans to continue to use less oil and search for more energy alternatives. However, it is unclear how the demand of the rest of the world will respond to these issues and how this will affect the global economy.Mouawad, Jad. "Crude Oil Continues Decline" http://www.nytimes.com/2008/09/16/business/worldbusiness/16oil.html?scp=2&sq=crude%20oil%20prices&st=cseEngdahl, F. William. “Perhaps 60% of today’s oil price is pure speculation”. http://www.globalresearch.ca/index.php?context=va&aid=8878

  18. Many oil-reliant nations are not viewing the recent drop in oil prices like most Americans are; a relief. The 13 countries that are a part of the Organisation of Petroleum Exporting Countries (Opec) were forced to cut production by half a billion barrels per day reports the Independent. May nations reveled in high gas prices and used profits to hide unstable economies. The Wall Street Journal reported on Thursday that falling oil prices could make projects intended to help increasing future demand obsolete. As long as prices don’t continue to fall these projects will remain in production, and the countries spearheading them like Canada and France will not feel any increased pressure. So while Americans rejoice in falling prices the rest of the world economy doesn’t. Opec reports that the price hasn’t fallen enough to hurt many of the most oil-reliant nations but that doesn’t mean that it isn’t foreseeable in the near future. Mia GuajardoNew Turnaround in Oil Prices Isn't All Good NewsDemand Could End Impetus to Explore New Energy Sourceshttp://online.wsj.com/article/SB122168617466549401.html#articleTabs%3DarticleThe Big Question: What's happening to the price of oil, and how is it affecting the world?http://www.independent.co.uk/news/business/analysis-and-features/article925525.ece?startindex=-1Opec eyeing decisive action to boost market http://www.gulf-daily-news.com/Story.asp?Article=229406&Sn=BUSI&IssueID=31184

  19. Oil uncertainty affects all aspects of life, particularly travel, be it for business or pleasure. The demand for oil is forecasted to rise “40% over the next quarter century,” with the development of industrialized nations such as China and India increasing their consumption. With the world’s refineries operating at near capacity already, oil producing nations have no incentive to increase production quantities, even if it were possible to meet the world’s future demand. The high prices of oil are changing the way the American travel industry functions; the airline industry being a prime example.The airline companies have four choices: “increase revenues, decrease costs, consolidate, or liquidate assets.” U.S. Airlines has had 17 successful fare hikes in 2007, and nine more as of march this year. The oil prices are too much for fare hikes alone however, more must be done if they are to survive. Unprofitable and competitive routes are quickly being dropped, particularly regional services. Larger planes are going to substituted for smaller planes, and older, inefficient planes will quickly be sold off, if not, then just parked in the desert. Routes that are abandoned are unlikely to be replaced by competitors, as is historically the case. Higher prices with less flights are going to drive down customer demand, creating a deadly cycle for the airline industry. Higher oil prices means that flying will be an even more miserable experience, changing the way Americans travel until a viable alternative to oil dependency is put into action.-Evan GormanUSA Today: “Oil Prices put Business Travelers over a Barrel”http://www.usatoday.com/travel/columnist/grossman/2008-03-28-oil-prices-rising_N.htm

  20. One reason for the rise in oil prices is speculation, as many have explained above. To illustrate this, oil traders are holding over 286,000 oil contracts for delivery in Cushing, a town in Oklahoma, but only 2% of them have any intention of selling it, hoping to sell their contract for a higher price than they paid for. The Economist offers an interesting insight in that article, stating the contrary, that “Speculation does not drive the oil price. Driving does”. The reason for this is that recently, a 10% increase in the price of oil only reduced American demand for by only about .3 to .8%. More notably, luxury pick-up trucks and SUVs accounted for 12-13% of car sales compared to 18% last year and the Department of Transportation reported that Americans drove 9.6 billion fewer miles in May than they had a year before. It is the decline in family income that reduces the number of cars bought, which means less driving.-Shi Li LiThe Economist “The Oil Price: Nothing to Smile About”, Aug 5,2008http://www.economist.com/daily/news/displaystory.cfm?story_id=11877319

  21. Miranda Cooper The problem we face with oil is as the demand goes up supply goes down. I don’t mean in the usual way of quantity supplied and quantity demanded either. As the aplia blog article stated, sometimes when the scare for oil increases to the point of panic providers of oil, to protect their interests sell less. Thus when the demand of oil changes, because of panic the supply of oil can also shift to the left or increase all around. As the article on hurricane Katrina and oil prices showed when people perceive a oil shortage, instead of buying less oil they start buying more. Thus with even the price of oil penalizing overly rambunctious consumers, the quantity demand and even the demand as a whole could increase. Thus with gas prices and the cultural dependency issues America has with this commodity (2004, Ben Bernanke) the market for it might not self regulate itself as well as other markets.

  22. Speculation along with uncertainty plays a large role in the price of oil in today’s global economy. In his speech in 2004 Ben Bernanke address three indicators that show us the effect speculation had on the market. He explains that we would see a reaction in today’s oil prices based on supply and demand speculations for future oil, traders would also hold onto claims for large deposits of oil in hopes to sell it should prices rise, and the physical inventories of oil would increase as companies would “curb” the production of oil to sell it at a higher price. In the past year oil prices have hit record highs almost daily due to our country’s oil consumption and lack of domestic production. As this spike in price increased companies began to produce more oil, as its profits were enormous with prices at all time highs, which is just as Bernanke says in his speech companies will “curb” the production of oil in order to sell it in the future at a high price. Increased production combined with a more conscious consumer use of oil has led to a recent drop in oil prices. -Ryan Paradis References:Remarks by Governor Bernanke, Oct. 21, 2004http://www.federalreserve.gov/Boarddocs/Speeches/2004/20041021/default.htmThe N.Y. Times: “Oil and Water: A Guest Post”http://freakonomics.blogs.nytimes.com/2008/09/11/oil-and-water-a-guest-post/

  23. While it is easy to blame speculation for the volatility of oil prices, there are advantages of the system in terms of preventing high rates of inflation and ensuring resources for emergencies as Bernanke pointed out in 2004. These advantages outweigh the consequences (continual change in quantity available and price) that we as consumers must face. Considering alternatives to the current system draws up a short list of options for the near future. The alternatives being discussed today individually have significant advantages and disadvantages, while collectively they share the same trait of uncertainty of success. Offshore drilling, collection of shale from the Rocky Mountain basin, drilling in the Alaska National Wildlife Refuge (ANWR), and alternative energy sources (natural gas, electric, nuclear) are viable option that have yet to be implemented by the US government. One may think that the discussion of these alternatives is the result of being fed-up with speculating oil reserves, but I think they are currently topics of intense discussion in Washington today, because speculation techniques are improving and even with wide tolerances and allowing for several new discoveries of reserves, most agree that we will run out within the next century. The future of oil will affect the world economy as we may see a shift in priority of goods if leading developed nations begin to rely on natural gas for energy production and transportation. Jim T.

  24. I think that as oil prices increase the economies that are dependent on revenues from oil will have to increase the price of their goods in order to keep making money. In the article about Katrina it discussed how the speculation in regards to rise in oil prices caused people to panic and purchase more gas. They compared it to a run on banks and people were overbuying gas and this actually helped accentuate the reaction to the hurricane destroying refineries (Souder). I know personally during this period I saw a lot of people saying they need to get gas before prices were affected even if they did not really need gas at the time. Souder, Elizabeth. “Fueling the Frustration.” The Dallas Morning News 2 Sept. 2005.

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