Comments on FiveThirtyEight: Politics Done Right: Friday Afternoon Leftovers

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2009-10-08T05:51:35.858-04:00

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2009-09-15T01:40:18.439-04:00

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2009-03-11T23:05:00.000-04:00

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2009-02-15T21:47:00.000-05:00

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2009-02-09T21:47:00.000-05:00

you're going to believe whta you want to believe.W...

2008-08-17T16:50:00.000-04:00

you're going to believe whta you want to believe.

We all have a tendency to accept data that agrees with our views and reject data that conflict with it. But I don't know whether one of us is more susceptible to that than the other.

Almost all market-savvy economists would agree with my assertion that the prospect of meaningful future supply, which offshore drilling would undoubtedly produce, is reflected in price immediately, not years down the road.... No one can exactly quantify it, but the sign is of indubitable direction.

I've looked at what others have to say on this issue, and I've found many analysts who say that the effect on future prices would be insignificant. I've found no source with data confirming a significant effect on today's prices. And if you can't quantify it, how do you know how important it is?

You keep saying that producers would need to be goaded into reducing their prices now, but what I explained was that they'd be more inclined to increase production, which has the effect of pushing down price, all other things being equal.

Is there any evidence that this is what is happening? And if more production is happening, is it in response to hypothetical future supply rather than present circumstances?

I don't think one should hang with bated breath on an incidental assumptions comment in a report by civil servants having nothing to do with economics.

I don't think the results of a government study should be dismissed simply because it comes from "civil servants." Some career civil servants get an awful lot right. Their conclusions should be graded and debated on their analyses, not on their status as government employees.

Moreover, I've read plenty of news reports citing independent analysts who say the price effect will be minimal.

It defies credulity to say that offshore drilling wouldn't make a meaningful dent in supply, and thus price. Just having more available domestic supply would reduce the potential volatility of energy prices because we'd be less vulnerable to OPEC manipulation.

It doesn't defy credulity if the added supply isn't enough to make much of a difference given worldwide production, and there are at least some (if not most) independent analysts who think that's the case.

Moreover, even if we could increase domestic production by an impressive 50%, we'd still be importing nearly half our oil. So it seems to me that the additional supply provides only marginal protection against OPEC manipulation.

Yes, the issue may resonate with voters, but I don't think they're being given a real long-term solution to the problem. Want to spend 40% less on gas? The best thing to do is make sure your next car is 40% more fuel efficient. Want to protect the nation from oil shocks? The best thing to do is to start transitioning off the stuff.

Drilling works against those long term goals. If it makes gas cheaper, we'll have more of an incentive to use it. It will delay the day when we make the decisions we need to make if we're going to kick our oil habit. That delay is not good for our foreign policy, our economy, or our environment. But if it's not going to have a substantial effect on prices, then there's far less reason to drill.

45% of our oil consumption goes into our gas tanks. European efficiency standards are already at 44 mpg. Right now, with today's technology. If in 10 years we drove those cars, we'd cut consumption by over 20% even if we did nothing else. And if in 10 to 20 years we don't have cars that don't need oil coming onto the market, shame on us for not taking the problem seriously.

It's hard to see why we couldn't substantially reduce our oil consumption within two decades and be mostly off of oil two decades later. If we're not really going to need the stuff, then it's hard to see why we should be so gung-ho about getting more of it.

But those are policy decisions we need to make. And we're not being asked to make them. Drilling only puts off the day that we make those decisions when I think it's far better if we start making those decisions now. But it remains to be seen if we're really serious about tackling this problem. Surely it doesn't help when politicians start touting gas tax holidays, an idea which had no support from any economist I know of.

DSimon, you're going to believe whta you want to b...

2008-08-17T00:04:00.000-04:00

DSimon, you're going to believe whta you want to believe.

Almost all market-savvy economists would agree with my assertion that the prospect of meaningful future supply, which offshore drilling would undoubtedly produce, is reflected in price immediately, not years down the road. Not sure why you have such trouble with that concept. No one can exactly quantify it, but the sign is of indubitable direction.

You keep saying that producers would need to be goaded into reducing their prices now, but what I explained was that they'd be more inclined to increase production, which has the effect of pushing down price, all other things being equal. Maybe that's where your block is.

As far as the EIA report, it's contents are being distorted. which I think mostly started when the opposing politicians started referencing it as a tool to deflect support for offshore drilling, and the quote grew legs without anyone ever really reading the report or looking at that quote in context.

The reason it says what it does is it assumes that production ramp would be slow, so incremental production would be small initially in the context of the international market. Probably true. One could say that about any singular production source. What that statement ignores is the forward looking effect of the market and the huge long-term potential of those fields.

I don't think one should hang with bated breath on an incidental assumptions comment in a report by civil servants having nothing to do with economics.

It defies credulity to say that offshore drilling wouldn't make a meaningful dent in supply, and thus price. Just having more available domestic supply would reduce the potential volatility of energy prices because we'd be less vulnerable to OPEC manipulation.

The reserve estimates in that same EIA report for just the outer continental shelf is more than 50 billion barrels of oil and almost 300 Trillion (with a "T") cubic feet of gas. That doesn't even count Alaska. History shows that big pools such as these are almost always underrated.

This is a big deal, and that's why it resonates so with voters.

You quote a government source as accurate and auth...

2008-08-16T17:49:00.000-04:00

You quote a government source as accurate and authoritarian?

First, I believe statements should be examined on their own merits. Anyone can be right some of the time. If I disagree with Newt Gingrich, I'll point out where I think he's wrong; I won't dismiss any statement just because it came from Newt Gingrich. If you want to criticize the EIA report on the merits, go ahead.

Second, not all government agencies are created equal in terms of credibility. The EPA has gotten a lot of stuff right, only to be stifled by political operatives (same with Justice and, for that matter, the military). And for the record, I haven't made a single post about Katrina.

Third, one would think that our government agencies would be biased in favor of claiming a big impact on oil prices from opening offshore drilling. The EIA analysis concludes the opposite.

Fourth, there are plenty of private, independent sources that say that offshore drilling will have no significant effect on future oil prices and little to no effect on prices today. In fact, I've heard no mainstream source cite the Group of 10's proposed compromise as a causal factor in the recent drop in oil prices. Some drilling advocates point to the timing, but coincidence is not cause and effect, especially when there are many other more immediately relevant factors at work (rising dollar, reduced demand in the US and elsewhere, and an anticipation of a near-term global economic slowdown).

I have no doubt that people in the market are analyzing all sorts of current and near-future conditions. I'm just making the argument that the prospect of future supply 10 years down the road will have minimal to zero impact on today's prices--especially when that supply is expected to have an insignificant effect when it actually comes onto the market.

But the market always gets it right in the end

I agree the market is usually an efficient mechanism. But if that were always true, we'd be getting better health results than Europeans. But we don't because the market puts the incentives in the wrong places for the efficient delivery of health care.

And I suppose the market does get a lot right in the end, but a lot of people can get hurt in the process (mortgage borrowers, mortgage owners, Bear Stearns). There are things government can do, such as disclosure requirements, that allow markets to work while smoothing out the bumps. Laws against misrepresentation and fraud are government "interference,""= and yet without them people could be duped into losing their livelihoods through no fault of their own, since you can't recover from a business that's already gone bust (which is the market's way getting it right in the end by punishing the fraud).

dsimon said: "our own government's Energy Informat...

2008-08-16T17:18:00.000-04:00

dsimon said: "our own government's Energy Information Agency has stated"

You quote a government source as accurate and authoritarian? Hmm, that's funny. Isn't this the same government you (I'm assuming) call inept - the same one who failed miserably in it's response to Katrina, has issues in the DoJ, and has bungled military efforts.

And you think what their stated "opinion" is carries any water when the best and brightest economists in private industry and academia can't fully and accurately assess changing market conditions?

Rudy was just making a point, a good one at that. The market is perpetually trying to gauge the impacts of current and future conditions, and understanding all of the amalgamized components of quantitative and qualitative data that serve as market movers, both now and in the future, is no easy feat. But the market always gets it right in the end, and government interference and bloated opinions are worth about two good pisses in the wind.

Bottom line: I trust the market long before I trust the government.

Rudy, I understand the argument, but I still don't...

2008-08-16T16:56:00.000-04:00

Rudy, I understand the argument, but I still don't see evidence to back up the claim that the potential of new supply seven years down the road has a great influence in the minds of these producers.

You say that the prospect of such supply might goad some producers into lowering prices now to preempt competition. But there's always an incentive to preempt more competition; it's inherent in the market system. If you charge more than someone else, people will buy from someone else. There's simply no evidence that some future additional supply would change that incentive to any significant degree.

You cite several possible influences regarding the recent price decline, but there's no way to assign any value to the rather tenuous though processes involved in guessing what supply and demand will be 10 years from now.

On the other hand, our own government's Energy Information Agency has stated regarding offshore drilling that "any impact on average wellhead prices is expected to be insignificant." Perhaps their estimate of reserves was on the low side, but it's hard to see how an insignificant effect would somehow turn into a substantial effect even if they're off by 50%. And it's even harder to see how, if the effect in the future would be insignificant, the effect now would be substantial. I think those who claim the EIA has it wrong should explain why.

It's far, far more plausible to think that the worldwide economic forecasts are pessimistic and anticipating an economic slowdown with an accompanying drop in demand for oil--not in the next decade, but right now. Compared to that, I'd think that the effects of speculation about future supply would have only a minimal effect if any on today's oil prices.

There are plenty of reasons right now that justify the recent decline in oil prices (you've named many of them). Given that there's no need to speculate on the effect of future supply on today's prices, I don't see why it makes sense to do so--especially when there's no evidence to back up the claim.

Realistixx, I like Clark as a choice as well. It ...

2008-08-16T16:36:00.000-04:00

Realistixx, I like Clark as a choice as well. It is a bold choice. Clark is outspoken, backs down from no one, is not remotely afraid to criticize McCain on the military, puts Arkansas back in play, is a buddy of the Clintons, Southern White male, Supreme Nato commander, etc...

I do agree with Matt that Obama has been playing defense for about a month now, since Europe. That said, Matt. Take a breath on the national polls. He was up 5 at the beginning of this week, and if you take 10 day averages, he has had a consistent 3-4 point national lead since early June. (There is an excellent graph on that from Alan Abramowitz.)

The race has been frozen, no matter how reactive this site is to 500 person robot polls from Rasmussen or criticisms that it is pro-Obama, a charge Nate has bent over backwards to disprove as he becomes in demand as an analyst. (From realclear to pollster.com to 270 to win, the other sites all like Obama's chances better than does 538, and in fact, 270towin, not exactly a leftist site, gives the dems a 92% chance of 270 and the Gops a 7% chance with 1% a tie, a far cry from Nate's 59%). All this is NOT to challenge Nate's methodology, just to say there are other, equally sharp and interested analysts who see the numbers more positively for Obama.

Also, I think we need to take Obama's camp at their word on what is important to them, based on their track record. Consistently from day one of the primaries, they said it was all about delegates, and they utterly schooled the Clintons on that. Now they say it is all about EVs. David Plouffe was quoted again as saying "I don't care at all about national polls" and they have also been quite explicit about which 18 states they are targeting. This week alone, Obama has varied between tied and 6 up on McCain in the tracking, and I guarantee you that is based on statistical noise, party id, likely voters, etc...if there is a 2 week period where McCain is ahead consistently in even ONE national poll, then we can pay attention. From what I have seen, looking back over about 200 national polls the last 2 months, McCain has a ceiling of about 45% and Obama has a floor of about 45%.

As for the state polls, please remember that, as Republican Scott Rasmussen's polling firm is the only one doing massive state polling, and therefore this site has no choice but to rely on one firm, with its own set of party ids, "leaners" "likely voters" etc...we need to take that with a bucketful of salt. If you have caller ID on a landline, you will never "speak with a robot poller" and if you have a cell phone you will never speak with a robot poller. Who tends to answer their phone when an unknown caller calls? Either someone who is very lonely or someone without caller ID or voice mail.

Anyway, to paraphrase the Clintons in 1992, it's the EVs, stupid - that is the ONLY game in town, and if the Obama team is anything, it is NOT stupid. The real question to ask is if you HAD to bet your life savings on either Obama or McCain getting to 270 how many neocons and cons on this site would bet on McCain today? Hands up? I hear the crickets chirping.

All that said, it is unfortunate timing for Obama that the Georgian crisis erupted after he started his vacation, and it offered McCain an opportunity to play president, make pronouncements, rattle sabers and dispatch Tigger and Eeyore (Graham and Lieberman) as his own foreign team.

Can you imagine the howls of "presumption" arrogance" "hubris" from the "liberal media" if Obama had done such a thing?

I think Obama's folks believed that with the olympics and the summer dog days, they were going to lay low, take the brief hit on vacation and announce the VP with a huge ad buy the day of the US game for the gold medal in Beijing. The choice probably cost them a point or two in the natioanals, but they don't care about that anyway, and maybe it is as simple as they want a rested candidate, since unlike McCain, he has not been taking weekends off the past 18 months.

Just a guess and again, I like the choice of Clark. A bold move and one that will shock the media talking heads, as they have all decided it is BidenBayh...

In Politics as in life there are no win situations...

2008-08-16T16:24:00.000-04:00

In Politics as in life there are no win situations. The situation with Hillary is one of them. If Obama cuts ties or railroads the Clinton's, a portion of the party will be split off and Obama will never get them back, and it may cause problems at the conventions, and the media will discuss the risks and stupidity of what he just did.

If on the other hand he complies with the Clinton's, goes for unity for the sake of giving in, the media says he gave in and looked weak, and the convention may be trouble. There are no good options. Damned if you do, damned if you don't. The Clinton's are the ones not being cooperative and putting Obama in this position.

Obama seems to be capitulating to the Clinton's quit a bit, and taking heat for it. Behind the scenes I'm sure these two groups do not get along. I suspect if Obama becomes President, he will have retribution against them on his time, in his own way. For now, he bites his tongue, and bears it.

It looks as though Obama has no clue who he's goin...

2008-08-16T16:15:00.000-04:00

It looks as though Obama has no clue who he's going to pick. All the major candidates have speaking engagements already scheduled at the convention, but for Clark and Kaine, and there are valid reasons to suspect both of them are out of the running.

From a logical point of view, the Obama campaign is having trouble with white men, Obama need foreign policy, and preferably not another senator. Clark fits all those rolls. On paper he's the guy, but if he's not being vetted, it won't be him, but maybe he is being vetted and trowing us off? This game of cat and mouse can be discussed all night.

An experienced white male with military experience would be ideal. I don't know if there are any generals out there that the media have not discussed, but if Obama picks an unexpected candidate, I'd lay good odds its a military guy.

My personal choice is Biden, i like the guy, but I see the negatives. Either way we probably don't have long to wait, the pick will be made by next weekend.

No Gallup today?

2008-08-16T16:02:00.000-04:00

No Gallup today?

I wasn't saying it was going to be Clark, just tha...

2008-08-16T15:58:00.000-04:00

I wasn't saying it was going to be Clark, just that I am 100% convinced that it should be.

Clark - Non-beltway insider, some political experience and international/management experience (he did run NATO during peace and war).

Biden - Another Senator, small state and a classic insider

Bayh - see Biden and then also add in the snooze factor

Clinton - Is this really change we can believe in... another senator and high negatives (doesn't really neutralize foreign policy meme either).

Sebelius - Outsider but not very worldly

Schweitzer - See Sebelius

The list goes on and on.

Clark is the hands down best choice. Plus he is very photogenic so Obama and him together will make for good visuals.

Hmm, Clark.... If that story is true, then Clark d...

2008-08-16T15:41:00.000-04:00

Hmm, Clark.... If that story is true, then Clark doesn´t deserve that treatment. You don´t take his PAC slogan and his role as a surrogate and then leave him in the desert. There must have been a deal struck before.
I have discounted the Obama/Clark ticket since Clark himself "endorsed" Sebelius for VP:

http://www.politico.com/blogs/bensmith/0608/Wes_Clark_floats_ObamaSebelius.html

So he has been a sure bet on Secretary of Defense for me.
It is suspicious though that Arkansas is the state left out from the Obama ground campaign, there are no offices there. Is this a sign for an Arkansan VP? I would say no, because even Hillary wouldn´t make Arkansas safely blue without at least putting a LITTLE organisation effort in there.
Well, in a way Arkansas is the Democrats´ Maine. Blue on local level, red on national level. Maybe the Obama campaign saw no need to bless Arkansas with coattail effects, especially since Obama lost the primary there by 40+ percent.

There are 3 big names still missing in the convention schedule: Clark, Gore and Kaine. Gore and Kaine might be the ones to introduce Obama on Thursday - if Gore wants to get himself involved in it. But ignoring Clark is in fact strange - though Wes Clark´s son has posted on Daily Kos that his father wasn´t getting vetted.

http://www.dailykos.com/comments/2008/8/15/193737/216/425#c425

there is a longer version of that post but I failed to single it out and link it. I really hope there isn´t a rift between Clark and Obama...

His capitulation to the Clintons this past week sh...

2008-08-16T15:39:00.000-04:00

His capitulation to the Clintons this past week show how he can be rolled easily and he shows a surprising lack of moral fortitude.

Can you guys explain to me exactly what you would have done in that situation?

It seems to me that you are saying "moral fortitude" means never compromising on anything. Ever.

Even when its a really trivial issue and a compromise will greatly benefit your side in the long run and a fight would be disastrous.

You must always stand your ground and never back down on anything!!

Don't you realize this is exactly why the current president has a 29% approval rating?!?!

Never compromising isn't "moral fortitude". Its stubbornness and its foolhardy.

Hillary came in a close second place. She wanted an empty piece of symbolism to acknowledge that it was a close race. What specifically did Obama have to gain by not giving it to her?

How would that benefit him, his party or his country in the long run?

Strength is about protecting what is important to you. Strength isn't about getting caught up in a pissing match over trivialities.

Seriously, can you tell me what you would have done and how doing anything opposite would have benefited Obama in the long run?

Oh, Wimpy, you're spouting full-out incongruities....

2008-08-16T15:28:00.000-04:00

Oh, Wimpy, you're spouting full-out incongruities. Half-truths. Wild speculation and extrapolation with no evidence. Horsehockey.

The contango of which you speak (an upward sloping forward price curve) is the normal state for markets. It largely represents the time value of money. When it's greater than the time value of money, it is financially beneficial to borrow money to take advantage of the price difference. That's called arbitrage. Goes on every day in every market, and doesn't net-net move prices because as much is being sold as is being bought.

To the degree that the market didn't arbitrage it out, it was because of perception of future shortages, much as we discussed earlier. To the degree that people speculated on that spead reducing, it did help market liquidity, but exactly as much for sellers as buyers, so again no net effect on prices. No matter what, it can only be a temporary phenomenon.

As far as the Southwest Airlines contracts go, they most certainly were the product of the futures market. Even when contracted with a private seller, that party would naturally hedge its risk in the futures markets.

The lion's share of all future markets activity is producer hedging. You think when Goldman Sachs is buying or selling huge gobs of contracts, that it's speculating? More often than not it's representing a client like kuwait, or Exxon, or whomever.

Now, it's true that there are individual floor traders or stock jockeys who are trading based solely on chart patterns, money flows, rumors, momentum, or whatever, and are wholly ignorant (willfully) of the bigger picture, But what they are reacting to is the aggregate wisdom of the market. Such types maybe can muscle the market a little here and there, but they're small fish in the greater context, and their effects are only temporary. Any of those who got caught wrongway in the turnaround got their clocks cleaned, but can't be blamed for causing large price movements, either on the updside or the downside.

I agree with you that excessive speculation always causes a nasty counterreaction, and thta's happening in the oil market now. But the free market is the best prevention and cure for that. In this case, government regulation contributed to the upside price movement because of the handcuffing of energy producers to generate more supply to meet increasing demand.

Mortgage fraud is a wholly different story, but is a huge problem that has shaken our financial system to its core. Way different than the dynamics of the oil market. It was an avoidable problem, and one that the stupid investors buying that paper have paid dearly for, as they should. That's how the free market cleanses itself.

What people did was already illegal, but the normal regulating device of a lender managing its own risk was abdicated, as brokers were packaging these mortgages and selling them as fast as they could originate them. Warning signs were out there, and a lot of people warned against them well in advance. But buyers were stupid, and chased seemingly low-risk yield. If they weren't stupid, demand wouldn't have been so high.

Definitely it was a failure of the market, and one that was AIDED by regulation, because the investors in these packages of mortgages thought they were mostly protected by federal insurance, so they decided they didn't need to do appropriate due diligence. Big mistake, and now we're all paying for it in reduced credit availability and potentially higher taxes to cover the bailouts.

More damage is done via regulation when it distorts the marketplace, especially when it tries to manage price. Government regulation of price creates shortages or rationing if sellers aren't willing to sell at the regulated price. Plenty of history on that.

Because politicians are so inept in understanding the unintended consequneces of their actions or the many facets of market drivers, their prescriptions are almost always severely flawed somehow -- either enabling gaming of the rules or causing an artificial price reaction.

Clinton has about the same chance of being vp as ...

2008-08-16T14:49:00.000-04:00

Clinton has about the same chance of being vp as I do ZERO! She would lose Obama 2 or 3 states and having the clintons waiting to stab you in the back would not be a plus.
Most of this polling in the last week has come from Rasmussen, so I wouldn`t get to worked up. Most people are not paying attention to the election right now plus I just think Rasmussen is underestimating Obama support.
Of course as the election gets closer and it looks like Obama will win he will adjust his support accordingly.

Good grief.This seems so bizarre that maybe it rei...

2008-08-16T14:46:00.000-04:00

Good grief.

This seems so bizarre that maybe it reinforces RX's theory.

A total head fake?

Reading the back-and-forths on the energy debate m...

2008-08-16T14:44:00.000-04:00

Reading the back-and-forths on the energy debate makes me sad. There's a perpetual stream of accusations on this site of people being suckered by taglines and propaganda, but one of the worst is the assertion that speculators have unnecessarily driven up energy prices.

That's just wrong, and the vast majority of economists have debunked that theory. Speculators have just become an expedient scapegoat for politicians who are too ignorant to address real issues.

And, unfortunately, a whole segment of society have been "suckered" by their bull shit. Oh, you can find a couple of economists at "Ivy League" schools who try and parade the same idea, but the only "evidence" they can provide is an increase in the trading volume/open interest of non-commercial futures traders (speculators) as prices have gone higher. The correlation is spurrious. Increased speculation DOES NOT cause increasing prices. On the contrary, increasing prices from tightening supplies (or other bullish fundamentals) bring more investors into the market.

Rudy explained it very well in most of his previous threads. I just wish many of the rest of you weren't so dense in trying to comprehend it.

No, I believe that Clinton will be the VP pick. W...

2008-08-16T14:26:00.000-04:00

No, I believe that Clinton will be the VP pick. With the bad polling results in the past week, Obama's chance of winning is rapidly dropping and Clinton is his only chance to consolidate support and win. It will make him look very weak due to the ease of rolling him as she will immediately overshadow him. However, he has gotten rolled over the past 6 weeks and being a weak winner is better than being a strong loser.

Dsimon, I thought I'd addressed the forward-lookin...

2008-08-16T14:19:00.000-04:00

Dsimon, I thought I'd addressed the forward-looking mechanism point amply earlier, but I'll elaborate a little more, hopefully not to the point of boredom.

What you do have to accept at face value is that markets are fairly efficient -- that the market price at any time reflects the best available knowledge about the balance of supply and demand and that trades are made at the prices at which both sellers and buyers think they're getting a good deal.

That's not exactly true, and often emotion or groupthink causes some temporary distortions from reality, but the market continually recalibrates and the price gravitates back. Thus, anyone who want to prattle about manipulation

The oil market is a little different than normal because of the presense of OPEC, a cartel which is there to attempt to maximize price by limiting supply production by its members. Its effect ebbs and flows, and in recent years, it's been able to accomplsh its task largely because worldwide demand has been increasing. Personally, I think it's about to enter one of its disfunctional periods because demand is sagging, but the member nations get dependent on the revenue, so will start cheating on quotas to try to make back some of the revenue.

In order to fully grasp the depth of the forward-looking mechanism, it's helpful to think like a producer. They don't all think alike, and often have different objectives or motivations. Your typical "big oil" company thinks differently than Kuwait, which thinks differently than Venezuela. Some, like those whose managements have jobs that depend on performance, have shorter-term objectives than those who are sitting on a big finite pool of oil that they must view as a lifetme asset to be used most productively. Some are using the revenue to support population growth or build military might.

All of these facets come together in the marketplace, and ultimately price boils down to supply and demand, both short-term and long-term.

As far as your widget analogy goes, here's how that long-term supply visibility manifests itself in the current market price: it's part of the mosaic of knowledge in the marketplace about future supply/demand dynamics, and that knowledge induces the producers to shift their thinking as to the best way to make the most amount of money, both short-term and long-term. Not all producers will react the same way, but on balance, they will be somewhat less optimistic about what price will be in the future (based on more supply), so some will be induced to try to make more money immediately, whereas they had previously been thinking that there was no rush because prices kept going up.

Thus, the prospect of more supply pushes down price fairly immediately. Your widget producer DOESN't know that people will buy the same amount they always have, and he's vulnerable to losing market share to widget makers that can sell more cheaply than him. So, maybe you lower prices now to preempt competition and make it tougher for new competitors to get a foothold.

The thought process of producers involves a myriad of factors and scenarios that will affect the supply/demand equation down the road and their ability to make money. It's fair to say that the aggregate wisdom of the market is greater than the wisdom of any individual player, becasue it considers the actions of all players, while an individual player can only act from his own viewpoint, while also trying to consider the logical actions of other players.

One might ask, why would, say, Saudi Arabia be willing to pump more oil at lower prices after having distained production increases just recently when prices were rising? (I'm not saying this is the case, but I do think it will happen.)

Well, when prices were going up stratospherically, demand looked like it would continue unabated, so to maximize total revenue it made more sense to contribute to supply shortages and hope to induce further price rise. They were also smart enough to recognize the severe limitations of alternative fuels in any forseeable time frame, so there was little perceived threat from alternatives. They saw that US producers were succcessfully being hamstrung, largely because environmental concerns (real or unreal) were trumping supply concerns.

Suddenly (over a couple months), three things happened:

1. US demand reached the tipping point and dropped somewhat sharply (aka price elasticity of demand).

2. US consumers, frustrated much more by oil costs than by enviromental concerns (some of which are increasingly dubious, others very real but relatively less important in economic crunch time), finally began to recognize how artificially limiting domestic production was increasing US vulnerability to foreign supplies and increases in world demand. So, finding ways to increase domestic production jumped to the top of the list, and offshore drilling where we know big reserves lie is the low-hanging fruit.

3. World demand dropped both because of price elasticity effects and because many foreign economies were finally weakening, lagging the US slowdown.

So, now, Saudi Arabia and all the other producers recalibrate their thought processes and have to decide how the changes affect their moneymaking outlooks, adjusting strategy and behavior accordingly, perhaps choosing to take more revenue in now while prices are still historically high.

The big fear all oil producers must have is that someday there might be an economic alternative to oil for transportation. That will cause massive price drops when a truly significant breakthrough happens, even if commercially 10 years away from affecting demand. Same logic as why future supply affects near-term prices.

It's in the oil producers' best interests to keep the value proposition of oil use high so that the hurdle rate for new alternatives is tough, and so that substitution of alternatives (like coal) doesn't further reduce demand.

Should the world truly start running out of oil rather than having contrived shortages, the price will go up and stay up. producers won't care about the elasticity or substitution effects because would be truly constrained, so their best interests would be to preserve underground assets.

That's not the case now. Some day it might be true, and economically-feasisble alternatives will proliferate accordingly. Efforts to accelerate that process through contrived shortages are doomed.

People correctly say that high prices will spur innovation, but that's only true when the market believes that prices will stay high.

Contrived shortages don't fit that definition. The fundamental problem most oil alternatives have is that they cost more, not less. No amount of government subsidy will change that. Once those alternatives naturally cost less, they will be embraced by the market and consumers. Not until.

To the degree that politicians embrace contrived shortages and high prices to support another agenda, they become at odds with the economic interests of their voters and vulnerable to attack.

Wesley Clark fits the mold. Could very possibly be...

2008-08-16T14:14:00.000-04:00

Wesley Clark fits the mold. Could very possibly be the guy.

wimpyVO2max,Excellent post. The deregulation of th...

2008-08-16T13:53:00.000-04:00

wimpyVO2max,

Excellent post. The deregulation of the nergy market occurred in 2000.

Senate Bill 3283, also named the Commodity Futures Modernization Act of 2000. Republican Sen. Richard Lugar of Indiana and Phil Gramm were listed as one of the bill’s co-sponsors. Like it had in the House, this bill was destined to go nowhere until, late one night, it was attached as a rider to an 11,000-page appropriations bill – which was signed into law.

Now traders had an officially deregulated market for energy futures.