In the past, I’ve often harangued my environmental economics students with the question of why, if we are running out of natural resources, the futures markets don’t project substantial increases in oil prices. After all, a constrained supply should lead to higher prices on the one hand, and the industrialization of China, India, and other countries suggests that world demand will continue to increase (or, at least, it won’t decline substantially). Add together lower supply and higher demand and we should be seeing higher prices.
The scholars at www.Env-Econ.net have a nice overview of the canonical Hotelling Rule that provides some logic for increasing oil prices, along with a potential price trajectory based on marginal production costs.
Yet, anyone looking out in the world today certainly has noticed that oil prices have dropped precipitously. This screen grab from Bloomberg shows that in late 2014 oil prices moved from the $80-100 range to the $40-$60 range for the better part of 2015. Prices have continued to slide, and were just north of $30 as of a few minutes ago.
So what are we to make of all of this? Continue reading A Slippery (North?) Slope