Or is the oil price craze a classic case of a bubble rather than a real price, long term price increase?The price of oil has quadrupled since 2003. If this dramatic rise were the result of speculation in a bubble economy and not the normal forces of supply and demand, how would you go about proving it?
Try using some well known concepts from statistical physics and complexity theory, says our old friend Didier Sornette at the Swiss Federal Institute of Technology in Zurich.
For economists, the term bubble refers to a situation in which excessive expectations of future price increases cause prices to rise above what can justified by a fundamental valuation.
One of the signatures of such a bubble is a faster-than-exponential growth in prices, something that has been seen in several recent bubbles such as the dotcom boom that busted in 2000, the US house price surge that peaked in 2006 and the sub-prime market which collapsed in 2007.
What creates faster than exponential growth? One possibility is positive feedback mechanisms which reinforce unsustainable prices rises.
The paper itself is here. This is really a Carlos-Doug-Noel regime paper than my own. However, wouldn't that be a kicker that the price of oil is largely due to unsustainable speculation like the dotcoms and real estate market? One check on that thought is that the price of oil just based on the devaluation of the dollar would still cause a 50% rise over what it was. There is still a feedback relationship with regard tot he devaluation of the dollar and the oil price's larger effects. It could be that the price of oil right now might "only" be around $70/barrel rather than its ridiculous current price.
I could also be completely wrong. This sort of thing is not my field and the above crew are last I heard indisposed. hrmph.
All I know is that I'm paying $40 at the pump...for my ECHO, and I have fond, yet distant memories of paying $1.69 a gallon. Remember those days? Those were happy days.
ReplyDeleteTo completely fill the Jeep it's about $90. Lyuda's PT is $63. In 1999, it cost be about $20 for the jeep and would have been about $12 for the PT. If we'd had it.
ReplyDeleteWhen I came out to Berkeley for my interview in April 2001, I thought the gas prices were high then: the stations that are now $4.75 here were $1.85.
sheesh.
Oh, God, not Didier Sornette, please.
ReplyDeleteThe only way a speculative bubble can maintain a long-term price increase is through hoarding. (You might think, what about housing? but housing is a much less liquid market than oil, no pun intended. There, the bubble popping is a long slow protracted process. Oil fluctuates fast.)
Everything is running near or at full throttle, even the Saudis. Basically, the supply and demand curves are like two scissor blades about to close. It doesn't take much pressure for the intersection of the blades to scoot higher.