Jay Reding.com

Why Oil Is Falling

The New York Times notes the way in which oil prices have been collapsing in recent weeks, along with the prices of fuel at the pump.

It looks like much of the price of oil in the last few months has largely been due to speculators predicting the sort of conditions that led to high oil costs last year would continue. It isn’t that supplies are getting significantly tighter, but that the markets were getting skittish over the prospects of conflicts in the Middle East and Africa, the aftermath of Hurricane Katrina, and a booming economy. Now that those conflicts are less serious than they were, the hurricane season has been largely a bust, and the economy is settling down, the price of oil is going back to where the equilibrium point really is.

Of course, had the government intervened and tried to artificially lower prices, who knows what would have happened. The reduction in fuel costs wasn’t do to government action, but the natural reactions of the market — had the government intervened it’s quite possible we’d be worried about shortages as ham-fisted public policy introduced dramatic shifts in the market. It’s another example of how sometimes the best public policy is no do nothing at all.

6 responses to “Why Oil Is Falling”

  1. reactionary ray says:

    No way !! I thought its a Karl Rove inspired plot to get the Repubs elected !

  2. Mark says:

    The long-term trajectory of oil prices is expotential inflation. With 1,000 new cars on the highways each day in China and India (not to mention the dirty high-emissions factories being built there to supply Wal-Mart after the shut down the low-emissions factories in America), demand will outstrip supply no matter how many global crises are averted or oil pockets are discovered in the Gulf of Mexico (with stunning timing before the midterm elections). Clearly, the GOP is gonna exploit this oil price downturn for every drop they can get out of it, and it may well work. On the other hand, I think even the dumbest hicks in the American electorate aren’t as naive as you pretend to be regarding the long-term trajectory of oil prices, no matter what we’re paying at the pump this specific week.

  3. Seth says:

    Gas prices are 60% higher than they were three years ago and you Republicans are just giddy about how well the free hand of the market works.

    If something is really screwed up and then becomes slightly less screwed up for a couple weeks that does not equal success.

  4. Seth says:

    Also, oil and gas are probably the most heavily subsidized product in the world. To say that government is currently doing nothing about gas prices, you’d have to either be a neocon wanting money from ExxonMobile or an oil company CEO.

  5. zzx375 says:

    What also wasn’t mentioned was that the traditional summer driving season is over and refineries are starting home heating oil runs (yes there is still big demand for home heating oil).

    Historically in this country prices at the pump rise in the spring and summer and drop in the fall and winter no matter who is in the White House or who controls Congress.

    Seth, I am not sure what subsidies you have in mind for domestic production but they are no where near what was in place when LBJ took over as president. And during his administration, the oil depletion allowance was repealed.

  6. Seth says:

    zzx375–
    Would have to see that to believe it. But also, under Johnson, oil companies actually paid taxes. And let’s not forget the hidden cost of having our military police areas where oil is, which are much higher now than in the late 60s