Thursday, August 14, 2008

The Fall of Oil Prices

It's been amazing to watch the rapid decline of oil prices in recent weeks, driven in large part by the fact that demand has dropped. People and companies have finally begun to make substantial changes in their behavior, as witnessed by AAA's data on the reduced amount on miles driven by Americans this summer.

If there is one positive from the high oil prices that we've experienced, it is that firms have implemented major changes to eliminate wasteful use of energy. Such cost reductions will help them become more competitive in the long run. It's interesting that the U.S. productivity numbers have been rather strong during the past few quarters, despite the downturn in economic activity. Perhaps the productivity growth is a reflection of firms trying to become more efficient to offset the high price of energy. Whatever the cause, the growth in productivity in 2007-2008 bodes well for long term economic growth, despite the short term economic troubles.

One last thought on oil prices... One does have to wonder about the timing of the shift in the oil market. Is it just a coincidence that prices began to fall when the goverment began discussing ways to crack down on short sellers who may have been acting inappropriately? Short sellers clearly play a useful role in our capital markets, but there are some questions regarding the appropriateness of some behavior.