The Impact (Psychological and Other) of $100 Oil
by Travis Pantin
Fri, 4 Jan 2008 at 12:34 PM
At the Cato Institute's blog, Cato@Liberty, senior fellow Jerry Taylor asks: Why all the hubbub over $100 barrels of oil?
According to Mr. Taylor, America's economy is hardly more affected by $100 oil than it is by $98 oil. "The $100 threshold is purely psychological and holds little import to the market," he writes.
Mr. Taylor also says consumers are not very likely to view the milestone as a reason to curtail their consumption. "The great public hunt for the 'tipping point' at which oil price increases induce significant changes in consumer behavior is akin to Captain Ahab's hunt for Moby Dick," Mr. Taylor writes.
He continues: "Since oil prices began their run up in 2003, demand has remained relatively strong and consumers have responded far less robustly than they did during the price run-up from 1975-1980. Although it is unclear why consumers are so much less inclined to conserve fuel today than they were yesterday, there is little reason to expect any radical change in consumer response to fuel price increases in the short term."
The more interesting question, Mr. Taylor writes, "is why oil prices have risen so dramatically since August of last year."
Recently, analysts have been attributing the rise in oil prices to a number of factors, including turmoil in the Middle East and growth in demand in India and China. Mr. Taylor says their explanations don't suffice.
"Turmoil in oil producing regions has, if anything, declined since August. Demand growth in India and China is hardly a new phenomenon. Oil production in the 3rd quarter of 2007 actually increased (4th quarter data is not yet in) and Middle Eastern producers are increasing discounts available to buyers of heavy crude. Oil inventories are likewise being liquidated — hardly a sign that speculators are hoarding oil to drive up price," he writes.
If anything, Mr. Taylor says research by oil economist Philip Verleger seems to show that most of the recent price movement might even be traceable to buy orders coming out of America for crude oil destined for the U.S. Strategic Petroleum Reserve.
Mr. Taylor writes that there is "little reason to succumb to the panic." The burden of recent high gasoline prices is overstated given the increases in median household income, he says. Furthermore, the "belief that high oil prices are important macroeconomic events that are capable of triggering recessions or worse have been shattered by recent experience." Consumers and the American government should not be too worried about the new price highs, Mr. Taylor writes. "If consumers want to reduce their fuel bills, there are ample opportunities available for them to do so. A good rule of thumb — even for non-libertarians — is that government should not do for you what you can do for yourself."
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