Leading Oil Exporter Fails to Understand Oil Market

Via CNN, there comes word that the Saudis do not think there is any reason to worry about supply and demand of oil. The price increase, supposedly is attributable to speculators and weaker currencies:

“The supply and demand of oil around the world is ‘normal,’ a key adviser to Saudi Arabia’s oil minister said Friday, pointing to factors including speculators and currency fluctuations for rocketing oil prices.”

That is wrong in many, many ways. There is no such thing as ‘normal’ supply and demand when we have been continuously using more oil, and intertemporal supply is limited to how much there is in the ground. Inflation has been growing in a number of developed nations, and far more steeply in the developing world, but the rise in nominal oil prices is shockingly higher than the rise in everything else, even though energy is often used as an input. Certainly, money supply is not the main problem, and to the extent it is a problem, it is a simply a contributing factor to the larger problem of too much demand. Saying that oil prices are an issue of weak money and not demand is a nonsensical, semantic-heavy argument. The speculation part of the argument has already been addressed on this blog, and needs no further debunking (see here and here).

The Saudis did say that they would continue to increase production. In the very short-term, this will help alleviate the supply problem that they claim does not exist. Of course, simply digging up and refining more oil is not sustainable, and it will only deplete fields more, causing the inevitable drop to be sooner and more painful.

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2 Responses

  1. I think the Saudi PR machine is really just trying to prevent a panic to keep prices down. They are afraid of prices getting high enough to destruct demand, so they have a tendency to spread news that will calm markets.

  2. […] on an oil price discussion in Saudia Arabia (remarks made by the Saudi’s are addressed here). He began promisingly enough: “‘All nations must be better at conservation, and the […]

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