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Monday, May 12, 2008

Gary Becker: The rise of price of oil

Yes, I am all hooked up with recent run-up of oil price.

Here is another piece from Gary Becker, one of my most admired economists. He thinks the predictions such as the one made by Goldman Sachs analyst, $200 per barrel crude in the near future "are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future."

Something to take away from his insightful analysis:
For the evidence is rather strong that the short run response of both the supply of and the demand for oil to price increases is rather small. The small elasticity of both the supply and demand for oil explains why the moderate reductions in world oil supply during the earlier price spikes, and the moderate increase in world demand during the current price boom, produced such large increases in price.