Media drops oil prices, saves world

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I don’t want to say that the media starts wars, or wins them, or actually causes economies to shift and roll. But I want to imply it, so I’m going to caveat this post with a note that of course, real life economics are at work in the world. It’s a given.

That said, did you know that the media starts wars, wins them, and actually causes economies to shift and roll? Seriously, folks, just as the media helped urge on the recession, so they played a near-comical part in the recent fluctuation of oil prices.

Because many of us breathe and eat oil, we know that it’s been much more expensive lately. In June of 2007, oil was about $75 a barrel. In June of 2008, it was about $140 a barrel. Of course this is due to any number of consumer and global influences: demand, war with oil producers, and the filming of this scene from Jarhead.

But wait! Is there relief? Oil has in the past few weeks plunged nearly $15 a barrel. Is it because President Bush wants to drill in conservation land with rigs made of pure baby seal bones? Probably not. But demand has lessened and confidence in oil’s upside might be waning.

Confidence. There’s the word I’m getting to. Check this baby out, but I’ll give you the important part of Professor Martin Feldstein’s Op-Ed in the Wall Street Journal:

…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. Similarly, 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.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

Long story short: the Street is as suggestible as we simple consumers are. Prof. Feldstein’s thought leadership piece ran on July 1. In the weeks following, pundit after pundit appeared on CNBC, CNN, and the Home Shopping Network to note that the oil demand curve will slope downward…

…and voila! Oil’s biggest decline of the year. Coincidence?

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