• Why oil prices rose and then fell?



    We have witnessed huge fluctuations in oil prices in recent months. Price has plunged more than half since its peak in July. Yes, OPEC can still cut their production, but what would consumers respond?

    Generally petroleum is a kind of necessity nowadays. People cannot live without transportation, and there’s no close substitute for transportation by cars, thus a fairly inelastic demand for gasoline, in the short run. However, inelastic demands may change to be elastic in the long run. When people are used to take public transportations and local facilities, the demand for oil will fall.

    Besides, prices are no definite indicator to revenues of petroleum exporting countries. Revenue is price times quantity. After you force the market into a zone of elastic demand, cutting production will not increase your revenue but diminish it further – even if the prices turned to rising! So, misters, be careful with what you are going to do.




  • You are right. Speculators are generally rational, but the problem is just on the "people" you have mentioned. Most influential speculators are institutional investors and they have better ways to obtain market information. Speculators are also predicting behaviors of other consumers before the latter ones predict the speculators.

    You know what, it is so great to discuss academically here. I do enjoy it. Although I am busy to death these days, I keep on replying as I find this discussion priceless.
  • You might not care for what they buy, but you must be concerned with how much they buy and how their purchase/selling will change chronologically. The reason is simple that the price will not be predictable, compared with the relatively stable buyer-as-consumer-only situation.
    I have always talked about the quantity. And if those speculators were rational people, their actions would be predictable as anyone.
    2008-11-13 15:41:23
  • True, but but the reason of their purchase is not consuming, but trading for profits, and hence this "demand" is quite different from other demand by real consumers, in terms of both pattern and magnitude. Parties in the market cannot predict their buying and selling, and what's even worse is that the speculators generally hold enormous capital that their market influence is significance, if not determinant.
    For me, I don't see much difference between purchasing by a speculator or an oil consumer. I don't care for what they buy oil. Demand is still demand.
    2008-11-12 17:12:29
  • You've made a good point concerning the relationship between elasticity and oil price. However, I'm concerned that things may not be this easy as speculators seem to take some part in the price fluctuation, and thus price is not that strongly affected by demand.
    You are right. Speculators do play an important part. However, speculators' demand is still demand. There is no fundamental difference between buying oil for selling or for personal use. In other words, if oil is of no use any more, no speculators would buy it anyway.
    2008-11-11 10:35:09