Oil shock

Another vote of thanks to James Hamilton (principal author of Econbrowser and an economics professor at the University of California, San Diego): I cite him again in this column for The Atlantic on the impressive irrelevance (for now) of the price of oil.



The oil market is not a bubble--fundamentals of supply and demand, not self-reinforcing speculative frenzy, are driving  prices--but nonetheless I am intrigued by the fact that the dearer the stuff gets, the calmer we appear to be about the economic implications. That thinking has bubble-like characteristics. You recall how fears about irrational exuberance in the stockmarket were more to the fore in 1996 with the Dow at 6,000 than they were a few years later, after it had risen another 4,000 points. Accustomed to an oil price that would have seemed terrifying very recently, we now seem to worry less, the higher it goes.

Financial bubbles often do not burst until the last skeptics—the ones
who called them bubbles early on, and rolled their eyes as speculation
raged—have capitulated to the mania and bought in. Once nearly everyone
is convinced that the rise in prices has some real economic foundation
after all, and not before, the whole thing goes pop. The pattern
repeats over and over. A parallel suggests itself. When even the people
who were worried about $40 oil have stopped worrying about $100 oil, it
may be time to panic. As the price of oil goes ever higher, we seem to
get ever less anxious about it. In the June 2006 Atlantic, I explained
why oil at more than $50 a barrel was having so little effect. But now
it’s almost double that. What ought to be obvious might therefore be
worth restating: The higher it goes, the more likely it is do real harm.

You can read the rest of the article here.   

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