Publications: Notes at the Margin

Driving with Eyes on the Rearview Mirror (March 20, 2017)


Consumers are intelligent. They form views of the future and act on those views. When consumers expect interest rates to rise, they rush to refinance their homes or other assets. They do not wait for rates to change. Consumers have also historically shown a propensity to act when they expect prices to go up. Shortages characterize economies experiencing high inflation as consumers try to avoid future price increases by purchasing in advance.


Those who model and forecast future energy consumption—especially oil—ignore these forces. In doing so they follow a more primitive approach, predicting changes in use based only on current and past prices. They also assert that cutting production will cause inventories to fall and send prices higher. The effect of expectations needs to be anticipated in assessing the future trend of oil markets. The ministers from oil-exporting nations attempting to balance the market, as well as the analysts and consultants providing them with forecasts, need to consider the impact of their decisions and their statements on consumers. Were they to do so, they might conclude that their output cuts were insufficient.


This week's report provides details on the primitive approach and discusses the market implications.


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