Realist, not conformist analysis of the latest financial, business and political news

Ed Conway’s Weird, Weird, Economics

This rather worries, that an alleged economist tells us that oil usage is going to peter out. Sure, we can see production falling at present, there is something of a glut of the stuff around. It’s also true that renewables are getting ever cheaper and the day we do rely upon dead dinosaurs is going to pass. But not as a result of current issues, no:

The oil industry is being out-innovated and outmanoeuvred at every turn. So perhaps it’s no surprise that Royal Dutch Shell has cut its dividend for the first time since the 1940s. It’s not just about Covid-19; they need all the money they can get to transition to net-zero by 2050. Perhaps it is no surprise MBS is on manoeuvres to dominate the sunset years of the fossil-fuel era. When even the linchpins of the crude industry buy into the post-oil thesis, it makes you wonder whether it might be right after all.

Now do a little basic economics. Oil’s come down from $60-ish to $20-ish. Now, without looking it up in those first two pages of the text book, where they have the supply and demand graph, what happens to demand for something whose price falls by 60% or so?

True, it’s usually in the second volume of the textbook that we get to fun stuff like elasticity of demand but there the point is made that long term elasticities are always greater than short term. So while oil demand isn’t going to move much as a result of the price change this week by next year or three the effect will be what?

Quite, predicting an end to the oil age as a result of a fall in the price of oil is not good economic thinking, is it?

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Spike
Spike
11 months ago

Apart from Covid-19, we have been getting better at finding crude, getting it out of the ground, getting to the crude we knew was there all along, and even refining it. You’re right, the hydrocarbon era is not going to end based on our increased prowess at it, reflected by its lower-than-ever price. But the excerpt mentions “net-zero,” and yes, the era might end due to nonsensical government mandates that we reject a solution precisely because it’s the best (and Computer Models predict that there are “externalities”).

Phoenix44
Phoenix44
11 months ago

Ed Conway, the man who wasn’t aware countries had different populations until a few weeks ago.

Charles
Charles
11 months ago

You ask “what happens to demand for something whose price falls by 60% or so?” . The correct answer is that it depends on the reason for the price fall. If the price has fallen because production has got cheaper, then we would expect the demand to rise as it is plausible that there are uses for that resource which were being inhibited because they were uneconomic. However if the price has fallen because demand has fallen, then we would expect there to be no effect on demand, except possibly in the long term, as the demand has already been… Read more »

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