Publications: Notes at the Margin

Expectations Frustrate Oil Producers (March 13, 2017)

 

The CERAWeek meeting media coverage was stunning in its failure to mention demand but for one exception. This occurred on the first day when the International Energy Agency’s executive director Fatih Birol presented the agency's medium-term forecast. Neither Birol nor any of those following oil markets, however, seem to take expectations into account. The impact of expectations is powerful. Consumers make decisions based on their expectations of the future. Young people borrow, assuming their incomes will rise over time and justify expenditures today, especially on education. Consumers also respond to changes in behavior by suppliers. Announcements by producers that they intend to reduce output to force prices higher likely lead to anticipatory reductions in use. Oil-exporting countries have not apparently considered that cuts in output designed to raise prices and reduce stocks lead to immediate consumption cutbacks by consumers that moderate any selloff from inventories and/or any price change.

 

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