I am routinely asked to comment for local and regional news outlets about oil and gas prices. Many in the media are often quick to blame speculators, hedge funds, and the oil company's for spikes in oil and gas prices. Yet, the cause for spikes in oil prices have far more to do with basic supply and demand. But as we recently discussed in my micro class, the key to explaining changes in oil and gas prices is the concept of elasticity.
Elasticity is a measure of the responsiveness of one variable to a change in another. In the case of demand, the elasticity of demand refers to the responsiveness of consumers (their percentage change in quantity consumed) to a percentage change in the price. In the case of supply, the elasticity of supply refers to the responsiveness of producers (their percentage change in quantity supplied) to a percentage change in the price. Oil, and one of its important byproducts, gasoline, are relatively unique in that they are very inelastic in both supply and demand, especially in the short run (most supply disruptions, political conflicts, weather, natural disasters, etc. are short term).
Yesterday, Becker and Posner both wrote about this topic in their blog. Becker's post is particularly helpful for understanding the concept of elasticity as it applies to the oil market. I recommend economic teachers take a look at this post.
Fluctuations in Oil Prices, Speculation, and Strategic Reserves-Becker 6/28/2011
Wednesday, June 29, 2011
Wednesday, June 15, 2011
Wednesday, June 8, 2011
Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011
CNN headline is a bit misleading... Feldstein actually believes, like many economists including Nobel winners Stiglitz and Krugman, that the Obama stimulus wasn't large enough. Put the recession and the stimulus package into perspective - we spent $800 billion to try and fix a $14.5 trillion economy, that's a little over 5%.
If you are a business owner and your company started to fail on a scale equal to the recent recession but you felt it was worth saving and could again be successful with the right investment or capital infusion, would you think 5% of the company's worth would be enough to get it done? And what if you could borrow against your company's value at historically low interest rates (as many US companies have done over the last few years)? I have yet to meet a business owner who, once the stimulus is put into perspective, doesn't start to question their own position on the issue.
Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011
If you are a business owner and your company started to fail on a scale equal to the recent recession but you felt it was worth saving and could again be successful with the right investment or capital infusion, would you think 5% of the company's worth would be enough to get it done? And what if you could borrow against your company's value at historically low interest rates (as many US companies have done over the last few years)? I have yet to meet a business owner who, once the stimulus is put into perspective, doesn't start to question their own position on the issue.
Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011
Monday, June 6, 2011
Update: Spring Slump
by Matt Malick
Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.
Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.
Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).
Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.
We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.
Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.
Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.
Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.
Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).
Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.
We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.
Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.
Subscribe to:
Posts (Atom)