Oil: When Inelastic Demand Meets Inelastic Supply

(cc photo by M Glasgow)

I saw on TV the other day an anchor being puzzled about how disruption of a relatively small share of world oil supply in Libya could be producing huge price swings. I think Kevin Drum has this right “World oil prices are largely driven by spare capacity these days. When it gets down to around a million barrels a day, where it seems to be now, prices can gyrate wildly based on very small supply shocks.”

Basically, we’ve reached a point where neither supply nor demand has much elasticity in the short-run so prices can swing around enormously.

To pivot a bit, the fact that we keep having this conversation about once a year during price spikes is one of the reasons I join Noah Smith in frustration that economists are too quick to gesture at “technology” as the source of all our problems. Why not look at some concrete, specific problems? The United States leaves itself persistently more vulnerable to oil price shocks than any other country. And yet the technology to insulate ourselves—lighter cars, smaller lots, buses, tall building near rail stations—we’re just not deploying it thanks to a set of tax and regulatory policies based on an outmoded industrial policy from an era when American auto companies ruled the world and the US was a net oil exporter. This isn’t the source of all our problems either, but it’s concrete and solvable and it’s certainly not part of the solution.