In the past few days the prices of most of the mainline commodities — such as copper, corn and especially oil — have plummeted. This — and the spikes of the past two years — is nothing new. It is simply the nature of commodities.
With most products, if the price goes up, consumers are less likely to purchase the item in question. Not so with energy. If the price of a gallon of gas doubles, consumers pretty much have to grumble and bear it. So even though the price of gasoline has nearly tripled in the last three years, demand for it in the United States has only recently began to trail off — and even that only by single-digit percentages. Food is less elastic than most products (because you have to eat) but more elastic than oil (because you can always eat something cheaper).
And oil’s inelasticity is becoming entrenched. Oil is a dirty and inefficient means of generating electricity and was abandoned in the developed world ages ago as a power fuel — in wealthy countries it is now primarily used for transport fuels, mostly gasoline and diesel. In the past few years, much of the developing world has made that shift as well. Since transport fuels have even fewer substitutes, they tend to exhibit less elastic demand patterns than power fuels, so oil on the whole is becoming a more inelastic commodity.
But there is more to it than the “simple” law of elasticity. The bottom line is that the impact of rising price volatility is more significant than the phenomenon of rising prices, especially since volatility goes both ways. The nature of the global energy industry has changed greatly in the past 15 years, and while some of the changes are tending to push prices up, nearly all of them have an even greater effect on price volatility.
First and most simply, there just is not much spare capacity out there. In normal situations the knowledge that there is more crude that could be poured on the market will calm troubled waters. Right now only Saudi Arabia claims any meaningful spare capacity — about 1 million barrels per day — and it is questionable whether that is really available (they have not brought it online in roughly 20 years). With production margins so thin, prices tend to gyrate a lot.
Second, the former Soviet states have joined the ranks of major participants in the energy sector, and so nderpin a greater proportion of world supplies today. During the Cold War most of their output was used to fuel the Soviet bloc, but now most is being sold on the global market.
However, unlike most of the Middle Eastern producers whose fields are very close to export ports, most of Russia and Central Asia’s producing regions are separated from water by thousands of miles.
