Sunday, August 31, 2008

Are even the rich changing behaviour?

A couple years ago, I engaged in an rather intense discussion with a friend of mine about the future of oil prices. He holds the view of the classic peak oil theorist . The height of our debate was when I claimed that people will change behaviour and prices would come back down. He disagreed, stating that the world is hooked on oil and there is little room for change.

Now, a few years later, prices have continued to rise more (and much to my surprise). Although I continue to have egg on my face, I remain optimistic.

What is proping up my optimistic view? Well, for one, Sean "Diddy" Combs is even changing behaviour ... WATCH IT HERE (warning: course language)!! Because the artist formally known as "Puff Daddy" can't afford the $250K fuel bill for his private jet, he is once again flying commercial and calling out to "his Saudi Arabian brothers and sisters" to lend him some oil.


Matthew said...

do you think that it's individual consumers that are driving oil prices, doesn't industry have a larger effect on prices? And when it comes to world oil prices aren't growing economies consuming more?

Canadian Economist said...

Great questions Matthew! With respect to the first question, both consumers (demand) and producers (supply) play a important role. However, as you suggest, because the production side is much more volitile, changes in supply (and/or speculation about supply) has been a point of focus for traders. Furthermore, in the very short-run, consumers can do very little to change behaviour. Although, over time, the demand-side can and has responded - and I remain hopeful about the future! To keep the same price, supply would have to fall if, for example, we drive small cars on average.

Second, with respect to your second question: Yes. Counties like China are demanded significant amounts of oil each year (only recently did they become an net importer of oil). How much more will they demand in the future, and the implications for prices, also depends on the other supply and demand factors at play.

It's complicated but great questions.