Sunday, September 11, 2005

Oil Economics

Some of the students in my intermediate macro class have displayed a real interest in trying to understand the recent movements in the price of gas and oil, so I thought I'd gather some links from blogs that have explained it much better than I ever could.

First Wikpedia has a good definition of the price gouging here. While I think it is a vacant, abused, and utterly useless term, Kevin at Truck and Barter believes we still need to take it serious and he sets himself to the task of answering a few questions about it. Lynne agrees with me.

There are a few really good blogs which regularly discuss energy issues that would be worth browsing. Lynne at The Knowledge Problem generally posts on energy and James Hamilton of Econbrowser does as well. His energy posts can be found here.

Hamilton discusses why suspending the state sales tax will have no effect on the price of gas. But then he corrects himself, because in fact there are certain circumstances under which it may reduce prices. Bryan Caplan points thouse out here. However the best part of Bryan's post comes from the discussion in the comments section. Let me summarize the discussion. Ultimately the degree to which price changes (if at all) depends on the short run elasticity of supply. The more inelastic, the less prices will drop. It appears that gasoline supply is fairly inelastic because, we import very little refined gas (<10%), refineries have little spare capacity (particularly after Katrina), and many states requie their own formulation of gas, further reducing the local supply elasticity by preventing inter-state transfers of gasoline. In the end we understand the theory, but we can't exactly quantify the outcome of the policy change becuase there are too many empirical unknowns. We'll have to watch the experiment unfold, but I'm betting prices only fall by a very small amount.

Keywords: ECO120, ECO305, oil, gas, price gouging.

1 comment:

Justin said...

I definately look forward to this because its a hot topic that so many people seem to misunderstand.

Here is a link I found to a June 2005 FTC report that I thought was very informative.

Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition: A Federal Trade Commission Report (2005)