Friday, June 27, 2008
We Are All Economists Now
"Is it possible for Congress to stumble into a correct or honorable action on the economic front? Just such an event seems to have occurred in May, with the passage of a bill to halt deliveries of crude oil to the Strategic Petroleum Reserve. When it takes effect July 1, the bill will cause an immediate pullback in the price of oil, as much as $20. So says energy economist Philip Verleger [PV]. His prediction is surprising, given that injections into the reserve are just 60,000 barrels a day", Christopher Helman at Forbes, 16 June 2008.
A $20 a barrel oil price reduction would surprise me too. 60,000 barrels is .000691 of daily consumption of 86.8 million barrels. $20 is .149254 of the current $134 price. I presume PV estimates oil's "demand elasticity" as follows: .000691 / .149254 = .004623, highly inelastic. Most estimates I've seen of oil's short-term demand elasticity are between .1 and .3, which is not even PV's order of magnitude. I suspect the 1 July change will not change oil's price at all. Why? It's already known and reflected in current prices. Apparently PV never encountered the efficient market concept in MIT's PhD program. I'm sure Chicago's Eugene Fama could enlighten you.