This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
11/22/2010
Falling Oil Prices
Is there any wonder why oil prices are falling with Ireland now joining Greece as the second European country requiring “bailout” assistance? According to an Associated Press article, “traders and investors are concerned [that Ireland will not be the last country requesting bailout assistance as] heavy debt burdens in Spain, Portugal and Italy may lead to other bailout packages.” In light of this news, it is apparent that in the near future the global economy will continue to slow and thus demand for oil will also decrease. These economic conditions are causing a “change in demand” by shifting the demand curve for oil leftward and thus prices are falling.
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3 comments:
In reading the referenced article, one of the parts that struck me is how China is tightening monetary policy. It says that China is increasing the bank reserve policies for its banks. The reserve ratio can be used as a tool for monetary policy, but increasing bank reserve requirements in the Western World doesn't really happen because it creates liquidity problems for the banks. The U.S. ratio is closer to 10% but the Chinese is now going to be 18.5%.*
The U.S. seems to be spending freely in an effort to get the economy going, but China is freezing up liquidity with its increased reserve ratio to the tune of about "44.8 billion U.S. dollars."*
It makes sense to read that in the past "China's rampant growth and thirst for energy have driven oil prices higher even as economies in the U.S. and Europe have been sluggish." It appears the Chinese economy is in in different state than our own.
*http://news.xinhuanet.com/english2010/china/2010-11/19/c_13614054.htm
It would sure be nice to see the lower oil prices get passed down to the gas pump. I think that we are going to be in this economic slump for several years. Hopefully we have seen the worst of it.
I think your analysis is fine, but I wouldn't read too much into European problems. These countries just aren't that big any more. Oil prices are increasingly driven by demand in Asia.
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