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December 25, 2008



I won't be injecting my seasonal green into Lowe's any time soon, if ever.

Lowe's Accused Of Firing Woman Over Xmas Pin

jj mollo

Gasoline is known to have a very high price elasticity, meaning that customers will buy it when they want it, almost no matter what the price. The flip side of that situation is that, when demand shifts for other reasons than price, the price can be dramatically affected. For instance, the influx of Chinese and Indian customers can increase demand without effecting supply very much, resulting in punishing price rises. And when the economy siphons money out of the customer pockets, the price can nosedive.

The silver lining is that falling fuel prices can provide a modest boost to the economy. The downside is that OPEC can control prices very effectively by controlling supply, but risks pushing the importing countries into a more serious recession.

Frank Warner

Don't forget that those oil producing nations quickly became accustomed to that $100 a barrel cash flow, and now that the price has dropped, many of them still want that same income. The only way to match that old cash flow is produce much more oil.

The OPEC nations will announce production cutbacks, but many of them will continue pumping as much as they can. That's the magic of the invisible hand.

Even when enough demand returns to allow higher prices, they'll be much more careful not to re-injure the gold-laying goose. It's the early 1980s all over again.

jj mollo

These things tend to cycle. People forget their earlier mistakes. It's also easy for them to deny that the price of oil is what caused the economic contraction. The US, on the other end of the seesaw, seems quite willing to increase dependence on oil again now that it is cheap. IMO, we will see cycles of oil booms and busts continually as the supply gradually becomes more and more constrained. Ditto for real estate. Our own government is not strong enough, too populist, too short-term oriented, to take effective action against these cycles. Some people don't even think it's a good idea to interfere with the natural business cycle.

Frank Warner

It's usually wise not to interfere with the natural business cycle. It's wisest to smooth out that business cycle by keeping producers and consumers better informed about supply and demand.

jj mollo

I'm not sure that there is any better information than that provided by the price mechanism. What were you thinking about?

I would agree that it is not wise to interfere with natural economic mechanisms when things are OK, but I don't consider the present unstable economy to be anything close to OK. Smoothing out the business cycle is more than a catchphrase. The business cycle is a killer. It requires a lot of planning, a lot of analysis, and a lot of wisdom over a long period of time to control the beast.

And we have stuck our collective neck out way too far in the energy business -- for decades. The natural market mechanisms are leaving us too dependent on an energy monoculture that is owned and operated by enemies of the United States. Even ignoring the threat of Global Warming, we have been foolish and profligate.

Frank Warner

By better information, I mean informing consumers better about all economic conditions, including real supply of oil, the likely supply 10 years from now, likely alternatives, environmental impact, and security factors.

As Ralph Nader often says, deregulation is best except when the consumer can't possibly see or understand all the information involved in an economic transaction. That's why we need an FDA.

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