Spring 2016

Author Archive

“Declining energy prices lower the cost of living”


Between June 2014 and February 2016, the CPI for urban consumers fell 1.2%, and the EIA found that the biggest component of this decrease was reduced expenditures on energy. The energy component of the C-CPI-U decreased by 35.3%, showing how the greatly decreased cost of oil (down 71% during the study period) influences household expenses. The decrease in energy costs offset rising food, shelter, and miscellaneous prices.


Effects of Major Oil Deal

Saudi Arabia and Russia, the two biggest oil-exporting nations in the world, reached a deal on Tuesday to freeze their production at their current record-high levels of production. This deal is meant to prop up the price of oil, which is at its lowest level in over a decade. However, the deal is contingent on getting other nations to join the deal; while Qatar, Venezuela, and Kuwait have conditionally joined the pact, Iran has recently had sanctions lifted on its oil exports, and has pledged to ramp up their production instead of cap it. The Iranians believe that they have no obligation to join the pact, because their oil exports need to “catch up” with other producing nations. “Our situation is totally different to those countries that have been producing at high levels for the past few years,” a senior source familiar with Iran’s thinking told Reuters. Thus, to make the deal sweeter for Iran, it is expected that the other nations will allow Iran to significantly up their output, but not to pre-sanction levels. It will be interesting to see what happens, as the news has not generated a spike in the price of oil because investors are unsure of the deal’s outcome or effectiveness in boosting prices.

This relates to our class discussion in a number of ways. While our conversation on the socially optimal rate of resource use did not mention international equity, that is exactly what these nations are trying to accomplish. However, there is certainly no concern about scarcity or “Peak Oil”; in fact it is universally accepted that there is a glut of oil on the market. To me, however, this situation shows the effect of competition on the market: prices will continue to slide unless these nations can ALL agree to limit production; if one nation (Iran in this case) “cheats” and continues to pump out oil, the producers will continue to lose money. However, this shows how important competitive markets are for consumers, as lower prices enable consumers to invest or consume in other goods or capital that they otherwise would not be able to.