How far that will go, no one can be sure. We are clearly in uncharted territory. But people used to say that electricty demand was inflexible and they were dead wrong.

My own hunch is that we will see fairly massive shifts to smaller cars etc which will create a lot of room for change. The only threat is that oil prices may come down significantly; that’s why I was suggesting a govt-imposed floor price as a matter of national security.

As to your economic analysis, I am not enough of an economist to be able to comment usefully.

A small martian town with 1000 people has a few oxygen dealers, and everyone needs to buy a tank of oxygen a day. The cost of each oxygen bottle is $1, and there is normally a high amount of supply, so the dealers sell oxygen for $1.10 to make a nice profit for themselves. One day the dealers run low on supply and only have 999 bottles. How much will each bottle cost? It won’t be slightly over $1.10. It will be a little more than the poorest person in the town can come up with. This is an example of an extremely inflexible resource.

Of course oil isn’t nearly this inflexible. There are a few people who will stop driving when the price gets high enough. But most people will resist this until the price is very high. And most trucking companies, shipping companies, ferries, cruise ships, trains, etc. will pay very high prices before they cancel a run. Also, our world is growing and new drivers, trains, ships, and trucks are being constantly added to China and India. I’m sure they’ll junk them all once the price gets high enough, but the price has to get pretty high before you put your new car on blocks and stop driving all together.

My point? Doubling the price doesn’t mean you’ve cut the supply in half. Also, a small bit of increased demand can have a large effect. It looks like we’re mostly disagreeing about whether the demand for oil is flexible or not.

(plus click on Dan’s links - good stuff)

I found the VMT data you were asking about at Sightline. I think you’ll find what you want in that .xls.

—–

Marketplace this morning had a little piece about oil prices and why, here.

Speculative bubbles? This is the subject of much discussion, but bubbles these days generally are not global, and these folk I respect have interesting takes (mouseover): here, here, here, here, and few folks talk about the market not working as Adam Smith wished for this case.

Is it?

And your statement that “small bit of increased demand can have a large effect” puzzles me. I know that is the sort of phrase going around; it sounds good but does it make sense? In fact we have a fair amount of very short-term flexibility in oil use. So I don’t see how that is so — unless you add in the fear factor, the unknown.

I don’t know how to express it in economic terms but I just don’t get how “small bit of increased demand for oil can have a large effect on oil prices.” Why is there a multiplier? Yes it will have an effect but since there are so many many ways to decrease demand in the short run which effectively increases supply, I suspect that there is more to this current price increase.

Now let’s get this in perspective. $63 barrel is by itself not cheap; and represents a social challenge. It was half that price in May 2004 — so there have already been big jumps.

But oil price doubling in one year? I don’t get it. I think the market is overshooting, just as it did with housing and just as almost all markets do.

But consider this: oil has doubled in price in the past year. Has global demand (GNP is a good index, I think) doubled? No way. I don’t think we are seeing secular demand create $130/barrel but some sort of bubble & speculation — though do remember than bubbles & speculations are based on fundamentals-gone-bizerk and so there is indeed a general increase in demand for oil which means long-term higher prices.Of course we in the USA pay more because our dollar is weaker — but all bad things come to an end and eventually we will climb out of our hole and the dollar will strengthen, thus effectively lowering oil prices.

So, no, I am betting that oil price has peaked for the time being and will head down to the $80 range, which is still a large increase over the $63/barrel it was last year this time. If I knew how to sell oil short, I would.

That’s not necessarily good news, of course. Higher oil prices are good in that they promote conservation and search for alternatives Rational national policy would put a floor under oil prices. But good luck there.

By LOUISE STORY
Published: May 21, 2008

Arjun N. Murti remembers the pain of the oil shocks of the 1970s. But he is bracing for something far worse now: He foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.

[…]

An analyst at Goldman Sachs, Mr. Murti has become the talk of the oil market by issuing one sensational forecast after another. A few years ago, rivals scoffed when he predicted oil would breach $100 a barrel. Few are laughing now. Oil shattered yet another record on Tuesday, touching $129.60 on the New York Mercantile Exchange. Gas at $4 a gallon is arriving just in time for those long summer drives.

Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011. Others disagree, arguing that prices could abruptly tumble if speculators in the market rush for the exits. But the grim calculus of Mr. Murti’s prediction, issued in March and reconfirmed two weeks ago, is enough to give anyone pause: in an America of $200 oil, gasoline could cost more than $6 a gallon.

Also good relevant stuff here:
http://seattlebubble.com/blog/2008/05/23/gas-prices-home-buying/