Tuesday, August 07, 2007

Oh No! The Sky is Falling!

I never cease to be amazed at the hysteria of the press. Headlines like, "Oil Prices Plummet!" are everywhere. www.kansascity.com | 08/07/2007 | Crude oil prices continue to decline Oil did drop about 3 dollars. That is in part because everyone underestimated the effect of price elasticity of demand.

The price of oil and gasoline went up. So people are driving less. Some states are worried about falling gas tax revenue, since cars are also getting more efficient. So the run-up to $78 per barrel for crude oil was all speculation, and fear-mongering over the limited supply. Turns out those fears were misplaced.

The price of a barrel of crude oil is still above $70. The market has NOT collapsed. The sky is not falling. But what would editors do if they weren't writing hysterical headlines - first about the horrible rise in oil prices, then about the horrible drop in oil prices? I mean be reasonable; you can't have hysterical headlines about the price of oil remaining steady now can you?

Update: It was just last week that everyone was predicting $100 per barrel - all because 1 contract (or one set of contracts) in the oil futures market was sold. People, if the people who run the markets could predict the future, they would have retired years ago. And, of course, the hysteria was rampant. Hysteria when the price of oil goes up, I actually understand. Since the US consumes more oil than we produce, a price increase is bad for us. Hysteria when the price goes down makes no sense at all.

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