Meeting with a very old economist

I met with a very old ecnomist. Indeed, he is not that old, but he is a loyal subject of old economic thoughts. I met him because of the debate on real oil price. Without any doubt, he argues that real price of oil will be decreasing. When I send email for comment, he sent me a brief one sentence comment, "A higher price eventually induces a greater supply, and the effect is larger in the long run than the short." Oh, well, market will solve every problem? You wish!

We have been seeing long battle to let people understand that climate change is real. Even a few years ago, few lay persons accepted the fact or science. Now, if you say that global warming is fake, people think you are ignorant or crazy. I can see the same attitude in peak oil discussion. They don't buy science, but they just believe what they want to believe. How pity it is! Fact is fact, and science matters. After 5 or 10 years, I hope to meet the old economist again to check who was right if he is still alive.

Another thought. What do you think about universal health care? It is a big issue in this presidential election. Surely, I support the plan. It is such a shame that the US does not have one for its people; Korea has one, and we appreciate this pretty much. Even Rumania has one; myRumanian friend told me that he had to go back to his country to treat his dental illness because our student health plan does not cover much, while his universal health plan covers more. The old economist mentioned that he is against universal health care during today meeting. Many "economists" may think that the plan is bad because of efficiency issues. Beautiful efficiency! What a convenient decision rule for the people who live in an imaginary equilibrium world.

I don't deny that I am one of normative scientists different from natural scientists. But my norm, as an ecological economist, is on earth: make this world sustainable and happier. That is my normative decision rule. Is it true that when we increase efficiency, more of us can be better off? Efficiency does not make people happier. Look at the poor average life expectancy in the US without a universal health care. It is a shame. Shame on you, very old economist!

[Real price of oil] My question

Still many economists and business forecasters may want to believe that current hike of oil price was caused by temporary distortion of market, and high price will increase oil production, then eventually oil price will be stabilized. However, oil production seems to peak and gradually decrease in the near future. Although there are some counterarguments on this, but let's stick on the peak oil scenario.

My question is whether real price of oil will increase or decrease when oil production decreases. In other words, whether will increasing rate of oil price still be lower than inflation rate of other commodities (Apparently, inflation rate (CPI) does not explain energy price)? Nominal price of oil will easily increase along with production decrease. It will cause supply-pulled inflation, too. We can consider two different cases about inflation and oil price.

1. Inflation rate will be greater than increasing rate of oil price. Then we can say that real price of oil will decrease. Although nominal price of oil increase, price of other commodities go up higher. Then we may feel that oil is relatively cheaper. Oil and other energy sources are basic inputs into production. When oil price increases, it may cause cascade of value addition. For example, 5% increase of oil price will signal timber producers to increase its product price by 8%. Then, it will signal furniture producers to increase it's product price by 10%. When market participants expect such basic input price to increase, they may over-react by charging more than actual increase of inputs. In conclusion, higher inflation will disguise "real" price of oil.
   
   
2. Increasing rate of oil price is greater than inflation rate. Then real price of oil will increase. In this case, the market reacts to higher oil price and reduces oil use in its production. Technological progress may explain this situation.
   

Both cases seem plausible. They can happen at the same time also. Question is which factor is more influential.

-Sung.

Debate on real price of oil in the future

While interviewing our department's chair candidate, there was a brief debate on the real price of oil in the future between two faculty members. They gave two different forecast about the change of real oil price. One professor forecasted that real price of oil will increase, while the other forecasted the opposite. This is very important issue in my field. I suggested a discussion to other students, and will post the discussion here.

-Sung.

FYI

• Real price: Inflation adjusted price.
  "Money price is the price quoted in money while relative or real price is the exchange ratio between real goods regardless of money (from Wikipedia.org)."
  
• CPI: Consumer Price Index. Government officially calculate it from some commodities, which do not include food and energy. In general, it is used as inflation rate.