Knowing and Making

Robert Peston's article today about Chinalco highlights an important point which few economics commentators have discussed. For the last nine months oil prices have been falling substantially. The developed economics spend so much money on oil that this makes a huge difference to the money available in our pockets. As a fair estimate we can say that world oil consumption is about 80 million barrels a day. Taking the lowest figures it's reasonable to say that last summer, the world was spending $12 billion a day on oil. Now, with a barrel of oil at $44 the figure is less than $4 billion. This $4 billion every day is now sitting in our pockets - exactly as if it came to us from a VAT or payroll tax cut. This is equivalent to a $3 trillion per annum fiscal stimulus paid for not by our own government but by oil exporters. How nice of them. (Caveats: some oil is provided on long-term contracts rather than spot price, so the movements won't have such impact; and the oil exportin...

When the Sirius Star  oil tanker was captured by pirates on 15 November, the crude oil price was around $55 a barrel. It contains about 2 million barrels of oil, now worth $40 each, so its value has fallen from $110 million to $80 million in the intervening period. Thus, aside from the rumoured $3 million ransom payment, the owners have lost $30 million in value of the commodity - plus whatever it costs to borrow $80 million for two months (not much these days). Yesterday, with oil getting close to its lowest point in a couple of years, the tanker was released. What possible economic explanations are there for this behaviour? And what does it tell us about oil prices? The owners may expect that prices are going to fall further, and decided that now is the time to get their oil back and sell it. Therefore they were motivated to deal now rather than putting it off. The pirates may expect that prices are going to fall further, and decided that their likely ransom would diminish. Therefore...