Publications: Notes at the Margin

Scissors Have Two Blades (April 17, 2017)


Economists teach that supply and demand determine prices. Occasionally, writers comment that prices are set by the two blades of an economic "scissors." Some have noted in the past that one cannot explain price determination with just a single blade. This, though, is not the case in oil. Those who write about oil markets have been obsessing—yes, obsessing—on global supplies and inventories. Reading the material generated over the last thirty days, an outsider would think the oil market is characterized by a fixed demand curve and an uncertain supply curve. Economists at trading companies, Goldman Sachs, and other organizations confidently predict that stocks will drop in coming months as the OPEC-engendered supply cuts “bite.” However, not one of the reports or speeches has asked whether global demand is matching projected levels. In this report, we ask and answer that question and discuss its market implications. Our analysis suggests that, for several reasons, the current optimistic projections of future consumption should be reduced substantially.


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