In the “RFPC” Sweepstakes, The Top Prize Goes to…

James Hamilton, for asserting that:

Low [oil prices] prices are increasing demand and will also dramatically reduce supply.

Someone, please model that!

5 thoughts on “In the “RFPC” Sweepstakes, The Top Prize Goes to…

  1. I interpret his statement as describing how the market transitions to its long run equilibrium. The short run price change induces further reactions as he describes.

  2. I don’t understand. The price of oil has dropped dramatically. We can’t reason from that price change. i.e., from that fact alone, we don’t know if the price drop was due to shifting of the demand curve, supply curve or some combination. We do know that the short term supply and demand curves for oil are steep (or at least steeper than the longer term ones). So now that the price has changed, supply and demand start reacting. But they can’t respond instantaneously. It takes time to book flight reservations. And a long time for the stock of motor vehicles to become more SUV heavy. Similarly with supply, it takes time to react. I recall this being called a J curve, perhaps? A J-curve to model the transition from the short run supply and demand curves to the longer run ones? The point is that some portion of future changes in price and quantity aren’t just sliding up and down existing supply or demand curves as one or the other shifts. A dramatic change in the price will cause the shapes of future short run curves to be different.

  3. Low oil prices are increasing demand and will also dramatically reduce supply. So this is reasoning from a price change? Ok, I can see that, but what is wrong with the statement? It seems reasonable to me. Suppose I had to replace the heating system in my house. The decision I make today will lock in a future demand for a fuel type for the next 20 years, almost regardless of variations in the future price of that fuel. The decision on heating system type will certainly be affected by the current price for that fuel, with a low current price greatly affecting my future demand for that fuel type.

    I think the same could be said on the supply side. A decision made today to not invest in oil wells at current prices determines a lot of the supply in the future. So even though this might be reasoning from a price change, I don’t understand why it is not still good reasoning.

    • Bill & Jerry, did you notice the effort you had to put into trying to make sense of a very short sentence? That sentence should never had been there. A blog post is read by (I suppose) smart people, but not necessarily economists. And the sentence will make them think they understood the facts under analysis, making everyone worse off!

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