BUSINESS ECONOMICS

Business Economics

Business Economics

The steadily rising oil price that we have witnessed of late is basically explained by the relation between 'flow' supply and 'flow' demand? as distinguished from the demand for stocks (i.e. inventories). (Winkler 2008: 45-55)

It cannot be denied though that the financial market occasionally plays a non-trivial role in the forming of (oil price) expectations? and this may be especially true at the present time due to the oil price rising higher and/or faster than the great majority of observers thought possible. One result of this state of affairs is that the oil price is being observed and thought about much more intensely than before. The allusion to very close observation brings to mind the 'uncertainty theory' of the Nobel laureate Werner Heisenberg which? transmuted from physics to financial economics? suggests that misleading signals are often generated. For instance? when the influential oil investor T. Boone Pickens stated that oil could surge to $150/b? prices immediately moved higher. This display of respect for Mr Pickens' acumen was impressive? although the term 'over-reaction' immediately flashed through my brain. (Winkler 2008: 45-55)

An important person who has insisted that traders are responsible for driving the oil price up is Abdullah el-Badri? secretary-general of the Organization of Petroleum Exporting Countries (OPEC)? who recently summarized his thinking on the oil price by saying “The market is really crazy”. In a broad sense this is absolutely correct? because much of the craziness can be attributed to politicians and civil servants in the oil importing countries? who liked to postulate that OPEC would never get its act together? and as a result the oil price would 'tank' rather than move north. The delusions of some of these persons have intensified? since many of them still entertain an irrational conviction that the OPEC countries would genuinely like to see lower oil prices? and are willing to help to bring this about. What should be believed instead is that very high oil prices have provided some of these countries with the wherewithal to continue the diversification of their economies 'out' of the export of crude oil (and possibly gas). (Lipsey 2007: 11-32)

Attempts to mitigate the impacts of oil price increases include:

* Increasing the supply of petroleum

* Finding substitutes for petroleum

* Decreasing the demand for petroleum

* Attempting to reduce the impact of rising prices on petroleum consumers

In mainstream economic theory? a free market rations an increasingly scarce commodity by increasing its price. A higher price should stimulate producers to produce more? and consumers to consume less? while possibly shifting to substitutes. The first three mitigation strategies in the above list are? therefore? in keeping with mainstream economic theory? as government policies can affect the supply and demand for petroleum as well as the availability of substitutes. In contrast? the last type of strategy in the list (attempting to shield consumers from rising prices) would seem to work against classical economic theory? by encouraging consumers to over consume the scarce quantity? thus making it even ...