Monday, May 9, 2011

Econbrowser: Lower oil prices

Jim Hamilton over at Econbrowser about the recent spike in oil prices...

I believe that events in Libya had been a key driver of the price of oil over the last few months. The country produced about 2% of total world supplies last fall. If one assumes a short-run price elasticity of demand of 0.1, that would warrant a 20% price increase if those supplies were knocked out and no one else had the excess capacity to replace them. Not all of Libyan production has been lost, but on the other hand, I have heard some analysts claim that Libya accounted for 15% of current light sweet production, where the real crunch has been recently.

The political currents recently manifest in North Africa could still easily spread to other key oil-producing countries. But if that does not happen, then with the likely response of consumers to the still-high price, and the promising near-term production gains, it is possible that this week's dramatic oil price declines are only the beginning.

In terms of what this means for American consumers, each $1/barrel change in the price of oil usually translates into 2.5 cents per gallon of gasoline at the pump. With the price of oil now down $16 from its peak, that might mean a drop of 40 cents per gallon in the retail price of gasoline.

The important point is that we have a global market.  So claims by the "drill-here drill-now" crew are off base.  These efforts would have little to no effect on the price at the pump..

 
At most additional offshore drilling can add a few hundred thousand barrels a day to world oil supplies. By contrast, Libya produced about 1.8 million barrels a day before its civil war, Algeria produces 2.1 million barrels and Saudi Arabia produces 9.8 million.

Changes in production by these major producers will have far more impact on the price of gas than our decisions on drilling offshore. People who know economics say this regardless of whether or not they are Democrats or like the environment.

No comments:

Post a Comment