Thursday, May 15, 2008

Oil Prices

Art Carden has a good post up on oil prices over at Division of Labour. Arnold Kling discusses oil prices and a disagreement with Paul Krugman over at Econlog. I think Art and Arnold Kling are correct. Supply and demand (including the operation of futures markets) explains the current high price of oil. In order for oil prices to come back down, there will have to be a relaxation of supply constraints (no more attacks on facilities in Nigeria, more oil production from Iraq, etc.), or a reduction in demand (perhaps due to improvements in alternative energy technologies). I'm not quite as confident as Kling or Caplan (or Krugman) that this is not a bubble, but that's because I don't really understand bubbles.