10/29/2011

Liquid Gold

Investors of oil futures contracts took necessary profits Friday as the market cooled off from the best weekly oil rally for nine months. This following months of extreme uncertainty of global economics centered on the U.S. and European debt crisis. According to this Bloomberg article by Moming Zhou, crude oil prices increased 4.2 percent on Thursday due to the report that economic growth has accelerated at the highest rate in the past year, and “European leaders agreed on a plan to curb the region’s debt crisis” (Zhou, 2011).

Though we are not extremely happy when fuel prices increase from $3.00 to $4.00 per gallon, this is a great sign that consumer spending has increased, causing a greater demand for oil and consequently, increasing oil prices. Where the U.S. has had a more difficult time drilling for oil because of administration regulations and offshore drilling issues over the past couple of years, there has been only a slight incline in the supply of oil produced in the U.S.

Big moves in commodity markets are driven highly off of speculation and reported news. For example, if I hear news that the demand for oil has drastically inclined because Japan is back on track after the quake, this will drive up prices as investors buy up oil contracts anticipating the big move. Due to increased contract buying volume, the contract prices will increase at a rapid rate. Oil will eventually reach natural equilibrium as the demand curve shifts to the new demand for oil. Sadly, Zhou's article also describes the contrary status of Japan, markets cooled off on Friday because Japan is still not doing so well economically following the quake, this lowering demand for oil.

According to this article by Ron Cooke on the Energy Bulletin in 2007, “oil demand … has been relatively inelastic since 1982” (Cooke, 2007), meaning that these big price swings do not effect crude barrel purchasers greatly, mostly due to the fact that these prices will eventually be passed through production and manufacturing to us as the consumer, and we as the consumer, use a lot of oil, and will unhappily pay the price.

So next time you fill up at the pump and notice that fuel prices have increased yet once again, remember that it may be due to the fact that our local and global economy may be improving.

Please see the market for Crude Oil on the CME here.

7 comments:

Dr. Tufte said...

-2 on Lando for multiple grammatical mistakes.

Lando is right: no one likes gas price increases, but at least for the last several years they have been a good sign for the global economy, if not for the U.S. economy.

Unknown said...

The price of oil is driven by more than supply and demand. "Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd."
"According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)"
The reason for this increase in the price of fuel is a very interesting one. The collapse of the real estate market also had an effect on the price of fuel. Investors who found themselves in a mad dash out of the dying real estate boom, next found their way into oil futures. This exodus into oil futures caused the price of oil to rise. The economy was struggling, but the price of oil, and the price of fuel at the pumps, was on its way up. Therefore, rising fuel prices is not always a sign that the economy is improving.
The price of fuel is elastic in the short run, but inelastic in the long run. When fuel costs increase, it becomes en vogue to purchase alternative energy vehicles, more efficient vehicles, or no vehicles at all. However, conumers find their way back to traditional fuel, regardless of the price, thus creating a situation where inelastic demand exists.

Windwalker said...

The price of oil is driven by more than simply the laws of supply and demand. "Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd."
"According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)"
The reason for this increase in the price of fuel is a very interesting one. The collapse of the real estate market also had an effect on the price of fuel. Investors who found themselves in a mad dash out of the dying real estate boom, next found their way to oil futures. This exodus into oil futures caused the price of oil to rise. The economy was struggling, but the price of oil, and the price of fuel at the pumps, was on its way up.
The price of fuel is elastic in the short run, but inelastic in the long run. When fuel costs increase, it becomes en vogue to purchase alternative energy vehicles, more efficient vehicles, or no vehicles at all. However, consumers find their way back to traditional fuel, regardless of the price, thus creating a situation where inelastic demand exists.
I agree with the author as good points were clearly stated, I simply wanted to add to the post with information I was previously unaware of.

Windwalker said...

The price of oil is driven by more than simply the laws of supply and demand. "Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd."
"According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)"
The reason for this increase in the price of fuel is a very interesting one. The collapse of the real estate market also had an effect on the price of fuel. Investors who found themselves in a mad dash out of the dying real estate boom, next found their way to oil futures. This exodus into oil futures caused the price of oil to rise. The economy was struggling, but the price of oil, and the price of fuel at the pumps, was on its way up.
The price of fuel is elastic in the short run, but inelastic in the long run. When fuel costs increase, it becomes en vogue to purchase alternative energy vehicles, more efficient vehicles, or no vehicles at all. However, consumers find their way back to traditional fuel, regardless of the price, thus creating a situation where inelastic demand exists.
I agree with the author as good points were clearly stated, I simply wanted to add to the post with information I was previously unaware of.

Windwalker said...

The price of oil is driven by more than simply the laws of supply and demand. "Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd."
"According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)"
The reason for this increase in the price of fuel is a very interesting one. The collapse of the real estate market also had an effect on the price of fuel. Investors who found themselves in a mad dash out of the dying real estate boom, next found their way to oil futures. This exodus into oil futures caused the price of oil to rise. The economy was struggling, but the price of oil, and the price of fuel at the pumps, was on its way up.
The price of fuel is elastic in the short run, but inelastic in the long run. When fuel costs increase, it becomes en vogue to purchase alternative energy vehicles, more efficient vehicles, or no vehicles at all. However, consumers find their way back to traditional fuel, regardless of the price, thus creating a situation where inelastic demand exists.
I agree with the author as good points were clearly stated, I simply wanted to add to the post with information I was previously unaware of.

Windwalker said...

The price of oil is driven by more than simply the laws of supply and demand. "Thanks to the recession, global demand in 2008 was actually down and global supply was up! Oil consumption decreased from 86.66 million barrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd."
"According to the laws of supply and demand, prices should have decreased. Instead, they increased almost 25% in that time - from $87.79 to $110.21 a barrel. (Source: EIA. See Google Spreadsheet)"
The reason for this increase in the price of fuel is a very interesting one. The collapse of the real estate market also had an effect on the price of fuel. Investors who found themselves in a mad dash out of the dying real estate boom, next found their way to oil futures. This exodus into oil futures caused the price of oil to rise. The economy was struggling, but the price of oil, and the price of fuel at the pumps, was on its way up.
The price of fuel is elastic in the short run, but inelastic in the long run. When fuel costs increase, it becomes en vogue to purchase alternative energy vehicles, more efficient vehicles, or no vehicles at all. However, consumers find their way back to traditional fuel, regardless of the price, thus creating a situation where inelastic demand exists.
I agree with the author as good points were clearly stated, I simply wanted to add to the post with information I was previously unaware of.

Dr. Tufte said...

I'm going to lay off this topic a bit.

There's an obscure, rare, and fairly complex phenomenon called contango.

N.B. Wikipedia describe this as "normal". A better description would be "uncommon but not unknown".

Anyway, contango is not a sign that the situation is normal. Instead, it's a sign that people can make money by holding a product off the market, in anticipation of higher future prices. That's usually a bad bet, which is why we call it speculation. But in contango, it isn't speculation; it's the right thing for everyone to do.

And, in 2007-8, we had contango in just about all the commodities, and ... oil wasn't the worst one. As a matter of fact, you could have done a lot better.