Supply and demand—illustrated

Posted: 15 March 2011 in Uncategorized
Tags: , , ,

And then there’s Nouriel Roubini’s story:

Severe unrest in the Middle East has historically been a source of oil-price spikes. . .

Even before the recent Middle East political shocks, oil prices had risen above $80-$90 a barrel, an increase driven not only by energy-thirsty emerging-market economies, but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets, owing to near-zero interest rates and quantitative easing in advanced economies; momentum and herding behavior; and limited and inelastic oil supplies. If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the “fear premium” via precautionary stockpiling of oil by investors and final users.

What we have are two different ways of telling the supply-and-demand story of oil prices: the latter based on an actual belief in the story, the former based on how oil prices actually get set.

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