Wednesday, August 31, 2005

Fuel: Time to relax

Yeah, gas is a touch higher for the next few days. Will it stay above $3.00, absolutely not. Will it ever get below $2.00, no clue. All over the medias today we are getting predictions of $3.50+, with almost no effort by any media outlets to contradict the predictions the "experts" are floating out doomsday scenarios. Econopundit offers some perspective:

Oil spiked to $70.80 a barrel in overnight trading, before closing at $67.20 on the New York Mercantile Exchange, up $1.07 but short of the record close of $67.49 set Thursday. Prices for wholesale gasoline and natural gas leaped as well.

"This is unmitigated bad news for consumers," said Peter Beutel, an oil analyst with Cameron Hanover.

The fact is (as Paul Krugman might say) we don't really know how an anticipation of higher energy prices will actually play out in our economy.

Left over from the 1970's is the "stagflation principle" -- the idea that higher energy prices pushes the economy's aggregate supply curve to the left (simultaneously raising price levels and lowering equilibrium output and employment).

But left over from the 1980's is the "Lucas supply curve" -- the idea that anticipation of higher prices cause some firms to anticipate higher profits and consequently hire new workers faster than otherwise.

And to complicate things even more (ahem!) both principles can operate at the same time and to some degree cancel each other out.

So play it cool, don't hyperventilate, keep thinking about the sick and homeless and let the economy continute to do what it does best. You may be surprised.

The invisible hand is an amzing thing, best to just let it work its magic.