WE CAN LOWER OIL PRICES NOW
July 2, 2008
Policy changes today that affect the future could quickly lower the current price of oil. Indeed, the relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil, says Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, and a professor at Harvard University.
- With no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise.
- Credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil -- and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.
- A rise in the spot price of oil triggered by a change in expectations about future prices will cause a decline in the current quantity of oil that consumers demand.
- The OPEC countries and other oil producers responded by reducing sales and cutting supply to bring supply into line with the temporary reduction in demand.
Now here is the good news: it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future, says Feldstein.
For instance, increasing the expected future supply of oil would reduce today's price. Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the United States or elsewhere, can therefore lead both to lower prices and increased consumption today.
Source: Martin Feldstein, "We Can Lower Oil Prices Now," Wall Street Journal, July 1, 2008.
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