In recent months, I've noticed that many people who attempt to explain "demand" don't know what they are talking about. They'll say things like, "demand is decreasing for gasoline
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Thanks for sending on the reply. MarkPele gets close to the mark, no pun intended.
First off, hedge funds have nothing, zero, to do with the price of oil. They have to sell that oil, or sell the contract, before the delivery date. The price of the actual physical oil, that Dow Chemical or Exxon or whoever buys, is the real price. If we compare the "spot" or real price to the future's contract prices, we'll see that they are very close, which means that speculation has almost no measurable effect. (There is a good CNBC video on this, see earlier post.)
Of course, Congress and a number of others would like to convince the pubic that these so called "speculators" (our 401K and IRA mutual funds, etc.) are the problem. If congress does something stupid, which would probably be anything, then the fallout will be in the mutual funds, as they suddenly are cut off from an investment vehicle that will actually maintain some value. Oil is certainly a hell of a lot better investment that gold, airlines, car companies, and almost everything else that is out there. (Berkshire is going a good job on this).
As to elasticity, well, MarkPele has it partially right. Elasticity basically explains that ratio of the change of demand or supply to the change in the price. Watch this 1 minute video to see what is happening with oil...
As you can see, the demand curve, and the supply curve, are both fairly steep at the crossing point. The higher the price goes, the steeper the curve on either side. That figure of 20 to 1 is at the current price. If the price of oil were to double, the steepness of the supply and/or demand curve might be even greater (essentially verticle).
People who stop buying fuel, or cut back, are exactly what the demand curve is all about. The higher the price, the less will be purchased, because Joe or Edna or Somalia or someone stops buying. This is straight out of the Econ 101 text (Schiller).
The so-called economist that said "the demand curve moved" is clueless, and should not be talking to anyone about economics. Of course the demand curve can move, but not in the cited examples.
As to supply, sure, it might now be profitable to drill in the Great Plains or wherever, but that isn't the only constraint, and it is the FLOW!!! that matters. Exxon is not going to drill a bunch of wells that flow at 10 barrels per day (which is above the US average). And, where would they get the rigs and crews anyway? They're all busy, every one of them? Are they going to invest in a bunch of new rigs when domestic extraction is in terminal decline? No, of course not, they are businessmen, and they are there to maximize profits, not to dig holes in the ground.
Whew...
Here IS something that is impacting the price of oil (in addition to peak oil factors, of course). The value of the dollar is falling, and so, the price, which is measured in dollars, is climbing more quickly than otherwise. Now this is an area of debate that would be worthwhile, because it signals that the dollar is headed towards a hyperinflation... not good at all for those of us who have savings. And of course, not good for anyone else either.
In any event, peak oil is issue that is driving everything else, all corporate decisions, all government decisions, all individual decisions. Oil is the true measure of value, because it is basically raw energy that we have figured out how to use in hundreds, thousands, millions of ways. What a person should read from the past few years is they used to be paid a salary of 2,000 barrels of oil ($20/barrel into $40,000); and now their salary is about 400 barrels of oil ($150/barrel into $60,000). In otherwords, their salary has lost 80% of its value.
Now, this doesn't kick in overnight, but that is where we are at right now. The economy will catch up (probably with a crash) some day soon.
First off, hedge funds have nothing, zero, to do with the price of oil. They have to sell that oil, or sell the contract, before the delivery date. The price of the actual physical oil, that Dow Chemical or Exxon or whoever buys, is the real price. If we compare the "spot" or real price to the future's contract prices, we'll see that they are very close, which means that speculation has almost no measurable effect. (There is a good CNBC video on this, see earlier post.)
Of course, Congress and a number of others would like to convince the pubic that these so called "speculators" (our 401K and IRA mutual funds, etc.) are the problem. If congress does something stupid, which would probably be anything, then the fallout will be in the mutual funds, as they suddenly are cut off from an investment vehicle that will actually maintain some value. Oil is certainly a hell of a lot better investment that gold, airlines, car companies, and almost everything else that is out there. (Berkshire is going a good job on this).
As to elasticity, well, MarkPele has it partially right. Elasticity basically explains that ratio of the change of demand or supply to the change in the price. Watch this 1 minute video to see what is happening with oil...
http://localfuture.org/media/wissner_aaron_econ_101.htm
As you can see, the demand curve, and the supply curve, are both fairly steep at the crossing point. The higher the price goes, the steeper the curve on either side. That figure of 20 to 1 is at the current price. If the price of oil were to double, the steepness of the supply and/or demand curve might be even greater (essentially verticle).
People who stop buying fuel, or cut back, are exactly what the demand curve is all about. The higher the price, the less will be purchased, because Joe or Edna or Somalia or someone stops buying. This is straight out of the Econ 101 text (Schiller).
The so-called economist that said "the demand curve moved" is clueless, and should not be talking to anyone about economics. Of course the demand curve can move, but not in the cited examples.
As to supply, sure, it might now be profitable to drill in the Great Plains or wherever, but that isn't the only constraint, and it is the FLOW!!! that matters. Exxon is not going to drill a bunch of wells that flow at 10 barrels per day (which is above the US average). And, where would they get the rigs and crews anyway? They're all busy, every one of them? Are they going to invest in a bunch of new rigs when domestic extraction is in terminal decline? No, of course not, they are businessmen, and they are there to maximize profits, not to dig holes in the ground.
Whew...
Here IS something that is impacting the price of oil (in addition to peak oil factors, of course). The value of the dollar is falling, and so, the price, which is measured in dollars, is climbing more quickly than otherwise. Now this is an area of debate that would be worthwhile, because it signals that the dollar is headed towards a hyperinflation... not good at all for those of us who have savings. And of course, not good for anyone else either.
In any event, peak oil is issue that is driving everything else, all corporate decisions, all government decisions, all individual decisions. Oil is the true measure of value, because it is basically raw energy that we have figured out how to use in hundreds, thousands, millions of ways. What a person should read from the past few years is they used to be paid a salary of 2,000 barrels of oil ($20/barrel into $40,000); and now their salary is about 400 barrels of oil ($150/barrel into $60,000). In otherwords, their salary has lost 80% of its value.
Now, this doesn't kick in overnight, but that is where we are at right now. The economy will catch up (probably with a crash) some day soon.
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