Well, the volatility isn't entirely surprising. The heart of all economics is the law of supply and demand, which have to more or less balance; the primary mechanism for balancing is price.
When a system is elastic -- that is, it's relatively easy for supply and/or demand to change in response to price signals -- the feedback tends to damp down fluctuations. Demand increases; the price goes up; supply rises in response to the fact that there's more money in it; the price goes back down again. The elasticity prevents prices from swinging too wildly.
However, when the system is inelastic -- that is, supply and demand don't change easily -- prices essentially *have* to move much more sharply to make the economics work. When there is too much demand for the supply, prices can and will rise very quickly until enough pain sets in to either cause demand to slack a bit or supplies to rise. And few systems are quite as inelastic as oil: supply is heavily determined by investments that are made years in advance, and demand is at the root of so much of our economy and habits that we don't readily use less. The result is that price swings can go very non-linear when things get just a bit out of whack, because it often takes massive price swings to force supply and demand to balance again.
So sharp rises and falls in the price of oil don't actually surprise me at all. I just wasn't anticipating it *now*, because I wasn't taking some of the factors into account.
(All of the above is greatly over-simplified, of course...)
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Date: 2009-06-03 03:00 am (UTC)When a system is elastic -- that is, it's relatively easy for supply and/or demand to change in response to price signals -- the feedback tends to damp down fluctuations. Demand increases; the price goes up; supply rises in response to the fact that there's more money in it; the price goes back down again. The elasticity prevents prices from swinging too wildly.
However, when the system is inelastic -- that is, supply and demand don't change easily -- prices essentially *have* to move much more sharply to make the economics work. When there is too much demand for the supply, prices can and will rise very quickly until enough pain sets in to either cause demand to slack a bit or supplies to rise. And few systems are quite as inelastic as oil: supply is heavily determined by investments that are made years in advance, and demand is at the root of so much of our economy and habits that we don't readily use less. The result is that price swings can go very non-linear when things get just a bit out of whack, because it often takes massive price swings to force supply and demand to balance again.
So sharp rises and falls in the price of oil don't actually surprise me at all. I just wasn't anticipating it *now*, because I wasn't taking some of the factors into account.
(All of the above is greatly over-simplified, of course...)