Oil and Gas Price Stability

Oil prices have risen 49 percent this year, stabilize this month

Even with the threat of military action in the Persian Gulf and the upcoming Labor Day holiday weekend, both crude oil and gasoline prices are pretty darn stable (although oil prices, especially, are high; more on that in a second). On gasoline, this Reuters article summarizes the results of the regular Lundberg survey of gasoline stations. In the most recent survey, gasoline prices were very stable, at levels sustained over 20 weeks! How often does that happen in the summer? Not very! This price stability is at least in part a result of the production substitution of gasoline for other distillate products such as diesel and jet fuel, which are less in demand because of economic slowness and the fact that many of us won't set foot on a plane unless we absolutely have to. So enough supply has been out there to meet demand without price having to adjust abruptly. Isn't economics beautiful?

Now, I'm sure you're thinking that I overstate the price stability of crude oil. Perhaps, but prices are not fluctuating as much as you might expect given that we are going into the fall/winter heating season and are talking about what to do in Iraq. According to this Bloomberg Energy article from Monday, oil prices have risen 49 percent during 2002, but they have been stable over the past month. This stability is at least in part due to changes in expectations — even though talk of taking on Iraq continues, oil market participants have become less convinced that such action would lead to oil supply disruptions. Those changed expectations have brought some stability to oil markets.

Stable, yes, but at a pretty high price, toying with $30 a barrel. Today Forbes reported that oil prices are rising today, toying again with $30 a barrel. What's so magical about $30? Once prices go above $30, OPEC begins to consider raising its output, as the two articles linked above point out. OPEC continues to struggle with balancing the incentive to reduce output to raise prices with calls from some member states, such as Nigeria, to raise their quotas so they can raise some money. Combine these dueling incentives with the slow economic growth that we are currently experiencing, and you have OPEC caught between Scylla and Charybdis. That's why Bloomberg Energy reports today that OPEC will probably discuss increasing production next month. Fascinating.

Lynne Kiesling is director of economic policy at Reason Foundation and senior lecturer in economics at Northwestern University.





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