Forget supply and demand. We're now seeing scarcity economics at work -- what happens when buyers fear they won't get what they need at any price.
By Jim Jubak April 29, 2008
If you think prices have become insane, you're right. But insanity rules markets for everything from oil to rice right now. In fact, insanity is the new "normal."
For example, why should oil sell for $119 a barrel, a whopping $55 a barrel, or 86%, higher than it did last April?
It's like the United States is suddenly out of oil, right? March crude oil reserves in the U.S. were actually 2.4 million barrels higher than reserves in February and only a trifling 3.4% lower than reserves in March 2007, according to the Energy Information Administration. An 86% jump in oil prices because reserves fell by 3.4%? I don't think so.
The global picture is similar. Global oil stocks held by developed economies came to 2.58 billion barrels at the end of March -- pretty much the same as at the end of 2007.
Global supply and demand is tight, with the latest projections from the International Energy Agency showing supply at 87.3 million barrels a day and demand at 87.2 million barrels. Tight, but supply is still ahead of demand.
Don't stop with oil prices, though. Look at rice, which recently cracked $1,000 per metric ton. The price of export-quality rice is up 173% in a year, even though global rice stocks will finish 2008 about 1 million metric tons higher than at the end of 2007, according to the U.S. Department of Agriculture.
Or copper, which is setting record highs just about every day and has climbed in price by 30% so far this year. Or aluminum -- up 28% this year. Or wheat. Or corn. Or, well, you name it.
Why normal rules don't apply
We've all heard the explanations. Demand for this or that has soared due to growth in developing nations, increasing production of biofuels or whatever, and supply has stumbled due to miners' strikes or an electricity shortage or a drought in Australia.
But lots of folks -- I get e-mail about this every day -- don't buy these stories. They see small production shortfalls, but still substantial stockpiles, and ask how this adds up to a 100% increase in the price of oil or rice or wheat in a year.
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1 comment:
nobody ever seemed to question that we buy commodities in $US. Since the Canadian Dollar surged in 2006-2007 hitting record highs no refinery ever stated that even though the price of oil had climbed that it now costed them half as much to buy a barrel of oil. Maybe we are stuck with insane prices because we never. We are stuck with insane prices because unlike Mexico we never took non renewable resources out of the free trade agreement forcing us to export vast quantities of gas and oil and buy our own supplies at commodity prices. Now that being said how many of our large oil companies are canadian owned? Well its good to see that the money form these sales said in Western Canada!
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