I want to believe him…

From Krugman:

Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals.

And it also suggests that resource constraints will be an issue if and when we do get a full recovery.

I want to believe him but why then… From MR:

This graph doesn’t bode well for my “rising commodity prices in the future theory.” However, Tyler Cowen would back me up as he had written about it in his previous post. (here) Rising incomes lead to a rising demand for these resources that will soon outpace the economies of scale and innovation that has depressed commodity prices so much over the years. Oil is obviously the leading indicator of this…we use it so much, it is quite precious, easy substitutes are not easily available, and our demand for it is highly inelastic.  While food or other organic materials will help keep the overall index down, I believe metals, especially heavy metals, should be next on the list.  They exhibit the same traits as oil however demand for them isn’t as high right now.  When incomes in the developing world rise to a point where they are able to build resource intensive buildings and demand high tech products and infrastructure, I can assure you they will exhibit the same traits that oil is experiencing now.

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One response to “I want to believe him…

  1. Pingback: I want to believe him… « Pushing Possibilities | Drakz Free Online Service

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