Sunday, April 20, 2008

Krugman: Why Oil Prices are Rising

No doubt the two factors that Krugman mentions are important but the price of oil also has a speculative component that puts it far above what it would be otherwise and also by limiting production OPEC nations are also an important factor in keeping the price very high. I would not be surprised to see a considerable decline at times in the future but obviously the decline will not last too long due to the factors mentioned by Krugman. This is from Krugman's blog.(NY Times)

April 15, 2008, 9:02 pm
Oil numbers
There are two basic facts that would seem to explain a lot about what’s happening to oil prices.
First, Gross World Product growth has accelerated — from 2.9 percent in the 90s to almost 5 percent in recent years, according to the IMF. All of this is because of growth in emerging economies, largely China.
Second, world oil production has stalled — after growing around 1.6% a year in the 90s, it’s been basically flat for the last three years.
So we’ve got rapidly growing demand due to industrialization in Asia colliding with stagnant supply, basically because oil is getting hard to find. (The demand shock is probably even bigger than the GDP number suggests, because China’s economy is highly energy-inefficient).
And the demand for oil is price-inelastic — that is, it takes big price increases to persuade people to use significantly less.
There’s probably more to the story, but that seems to be the basic thrust. And it seems to be a recipe for rising prices for a long time to come.
This is what peak oil is supposed to look like — not Oh My God We’ve Just Run Out Of Oil, but steady pressure on the economy and the way we live from rising energy prices and their consequences. And it doesn’t matter much whether we’re literally at the peak, or whether production can rise by a few million more barrels a day; unless there are big sources of oil out there, we’ll be feeling peakish for the foreseeable future.

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