Macroblog On Energy Prices

Lynne Kiesling

Here’s a nice post on energy prices at Macroblog (and he’s even one of my homies, who knew?) that is worth a read. Yes, as he points out, oil importing countries do see the increase in oil prices as an inward shift in their supply curve. But it’s also true that, unlike the early 1970s, the outward shift in the world demand for oil (largely spurred by China and India) is of greater magnitude, and is therefore unlikely to have the same macroeconomic effects as the oil price spikes of 1973-4 and 1978-9.

Mr. Macroblog also usefully points us to a very informative post at Calculated Risk, involving graphs and the like that explain things nicely. For instance, he shows that when there’s a demand increase and the supply of the good is inelastic, prices can spike. The money question is whether or not, and how quickly, suppliers respond to the price increase and bring more supply to market. If supply is that inelastic because suppliers are so close to their production capacity constraints, then that’s not so likely.

I have to say, I’m not going to indulge in any recession-related wailing and gnashing of teeth until the nominal price of gasoline goes above $5/gallon. If that happens in the next year, then we’re spending more for gasoline in real terms than we did in 1974, and then I’ll get my dander up, because the last thing I want to see happen again is 1974 (actually, personally, the last thing I want to see happen again is 1991, but that has nothing to do with the economy …)

Thanks to Economics Roundtable for the link to Macroblog.

UPDATE: See also this post from Steve Verdon on oil prices.