Thursday, June 22, 2006

Teaching and Learning with Headlines

It started yesterday as I was looking at a financial market web site. I noticed that oil prices were hovering around $70 a barrel, slightly up for the day (nothing new there), and gasoline prices were somewhat higher. I then noticed a bulletin about oil and gasoline stockpiles both growing. In fact oil stockpiles were at a multi-year high. (The last time we had this much oil on hand the price was about $15 a barrel.)

I wondered, if oil and gasoline were in plentiful supply, why were spot and futures prices remaining stubbornly near $70, and why had my local station recently pushed the per gallon price up by more than a nickel in the past 24 hours? Didn't economics say that increased availability would push prices down? I dug further, found my answer, and the economics lesson was revealed.

1. Price is not determined solely by supply but by supply and demand. Two news headlines provided the link to demand. From Iran: a statement saying that the U.N. offer of concessions for giving up the nuclear program in that country would likely not be answered until August (read further uncertainty and fear in the marketplace), helping to drive demand by countries/firms seeking to secure supplies now. From Saudi Arabia: a statement speculating that an assault on Iran could triple the price of oil (same effect).

2. Prices tend to be sticky, especially on the downside. To what extent do oil producers (any particular countries come to mind) have a disincentive to let prices drop, and how could providing "information" impact the current price structure?

Your thoughts and observations are welcome.

Posted by TSchilling at June 22, 2006 5:36 PM

It's the expectations game. Gas supplies were up, but only a fraction (20-25%) of what was expected. That was noticed.

Posted by: Lord at June 22, 2006 6:40 PM

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