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.


Edgar Alpo said...

Our monetary system uber-sux. Billionaires borrow money from their friendly lodge member banker to buy XYZ asset. If they unload XYZ for a profit they keep the profit. If XYZ goes down, the bank, which never had any money to begin with, gets the asset. When the bank gets in trouble the taxpayer bails it out, or Mr. Banker Scumbucket takes his loot and starts another bank. Rinse repeat. The billionaire never risks any of his own money, neither does the banker. The only losers are investors and the public at large. What a racket! I will never trust the money system. I will use it, but I won't ever trust it. It is the worst system in the world, and they get away with it. Amazing.

Independent Accountant said...

This is exactly how the leveraged buyout business (LBO) works. The banker lends the LBO guy public money. If all works, fine. If not, the banker loses the public's money. If the banker gets in enough trouble, the Fed bails him out. The banker waits a few years, having learned the LBO trade, then he becomes an LBO guy and repeats the cycle. The losers: anyone with money in a bank account and the taxpayers.

PrintFaster said...

I actually want to comment on your topic.

What is happening here is a case of claiming credit for "post hoc, ergo propter hoc". That is crude prices are going down, so the author wants to give congress credit for their brilliance and claim "Bush's fault".

It could not be more transparent, if it were windowglass.