Piqued by Oil

The price of petroleum's slacking

With all of that pumping and fracking

Maintaining supply

At a level so high,

While demand, at the same time, is lacking. 

One would think, from the low price of crude,
That the future has been misconstrued,
But there's finite supply
In the ground, which is why
When it's emptied, it can't be renewed.

The price of oil continues to fall as, in the face of weak demand, producers from the Arabian peninsula to the tar sands of North Dakota keep pumping it out.   Like the protagonists in the famous Prisoners' Dilemma, exploration & production companies know that they would collectively benefit by slowing the pace of production, but individually they are motivated to cover as much of their costs as possible. 

In the short run, this development benefits consumers around the world, especially where the cost of driving is a major factor. At the same time, the oil exploration & production companies and their lenders are reeling from prices far below those they assumed when budgeting for the costs of extraction. 

In such times it is helpful to take the long view, which is that we are headed toward an eventual fall from the "net energy cliff," in the words of oil analyst Chris Nelder. This is the point at which it takes so much energy to extract the petroleum that it's no longer worth it. Notwithstanding today's bargain prices, that point may be closer than you think. 

Admission Control

Said a girl at the school where she prepped:
"As of late, it is hard to have slept,
When my counselors relate
The diminishing rate
At which colleges lately accept."

"I must temper my high expectation
For my 20th school application,
As it may be perhaps
My profusion of apps
Will worsen a bad situation."

A Chicken & Egg Problem

For GDP growth to look handsome,
Manufacturing's got to expand some,
But someone must buy
That expanded supply,
So we've got to expand our demand some.

"Without Demand, Manufacturing Can’t Pump Up Output or Jobs," says The Wall Street Journal's Real Time Economics blog. As much as many, including the White House, have pinned their expansionary hopes on a US manufacturing renaissance, this only works if foreign and domestic demand keeps those factories busy. Right now, both appear to be softening.

Recent factory surveys from the Federal Reserve Banks of New York, Philadelphia, Richmond and Kansas City show more respondents reporting falling orders than expanding. Moreover, "a third-quarter survey done by professional services firm PwC found 67% of major U.S. industrial multinationals said 'lack of demand' was an expected barrier to their company’s growth over the next year. That was the No. 1 choice among a list of obstacles that included energy prices, regulatory pressures and taxes, and was a jump from 48% pointing to a lack of demand in the second quarter."

Third quarter US GDP is set to be announced this morning at 8:30, with the consensus forecast of an expansion at a tepid 1.7% annualized rate. At the moment, the prospect of manufacturing our way to faster growth looks dim.

Supply or Demand?

Professor John G. Treble of Swansea University in Wales paid a visit to our Rhymes by Readers page and contributed a classic economic limerick from the halls of academia:

Said Moore: 'Oh goodness, oh my,
This demand curve is sadly awry.'
'Not so', said Working,
'A fallacy's lurking.
It isn't demand. It's supply.'

This is a reference to the Identification Problem in econometrics; when observing the data on sales of a particular good, it is difficult to determine to what extent any changes are due to a shift in demand, or supply, unless one of them is fixed and the changes are a function only of the other. This problem was researched by Elmer Working (1900 - 1968) who, along with his brother Holbrook, was a pioneer of the field of econometrics. The Working brothers were preceded by an earlier pioneer in economic statistics, Henry Ludwell Moore (1869 -1958).

Thank you, Professor Treble, for this historical limerick-econometric contribution!

A Fruitless Market

Said a husband: "The Lord will not bless me,
Dear wife, with descendants, unless we
Make a deal with a neighbor
The fruit of his labor
To compensate with a success fee."

Many offers came in by the bunch,
And a contract was drawn up at once,
But later said Eve:
"I cannot conceive
Why it hasn't worked out in six months."

So the laws of supply and demand
May not always function as planned,
For sometimes you need,
For a deal to succeed,
More than just the Invisible Hand.    

Via Tyler Cowen's Marginal Revolution blog comes the story of a couple in Stuttgart, Germany who hit upon a commercial solution to the age-old problem of male infertility.  To compensate for the husband's shortcomings, they elected to pay a neighbor to impregnate the wife.  As with so many forms of economic stimulus however, and despite months of earnest endeavor on the part of the neighbor, the results fell short and there were unintended consequences.  You can read the entire story in a surprising source: the July 27, 1978 issue of Jet magazine.

Crude Commodities

When politics don't go as planned,
Commodities get out of hand,
As markets pay heed
To the fear and the greed,
Instead of supply and demand.    

The gyrations in the price of oil that have accompanied the uprising in Libya - a country with only 2% of global oil reserves - once again highlight the fact that markets are often more focused on the fear of adverse consequences (and the greed for what scarcity could do to prices) than actual changes in supply.

Econ 101

A shift in demand quite suffices,
With a given supply, to raise prices;
This idea, though descriptive,
May not be prescriptive,
To guide one to virtues from vices.   


Thanks to James Kwak for provoking a passionate debate on the ethics and economics of scarce resources in his blog, The Baseline Scenario.