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Testata registrata presso il Tribunale di Patti Reg. n. 197 del 19/07/2006

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Black Gold, Black-Scholes and Black Holes


Federico Pontoni - Antonio Sileo



CERNís experiment has just ended and if you are reading this, it means that we are still alive. No black holes are coming in the near future. To us this means that human beings have not yet invented an instrument capable of destroying the world, not even economists. As a matter of fact, the black hole thing was not the worst fear of this 2008.
We celebrated New Yearís Day with oil climbing up to 100$/bbl. Many Cassandras told us that with a barrel reaching 150$ we could have undergone recession or even depression. It was feared that oil could have swallowed everything, leaving our economies without gas. Moreover, there were plenty of experts saying that it was only a matter of months and then we would have reached 200$ per barrel. They were sure that we were quickly leaving the era of cheap oil. And in fact we spent more than six months trying to understand what was happening and why. Some analysts blamed Chindia, the Far East monster with more than two billion hungry mouths. Others blamed speculation and the sales of paper barrels. The smartest analysts explained us that this lack of oil was the consequence of poor investments in the Ď90s, when oil cost less than 20 $/bbl.
Suddenly things have changed. Speculation is driving oil down, while world economies have not suffered a black gold disease, even though they are slowing down. The globalized market has shown once again that the Great Moderation exists. We are not saying that this crisis is just a storm in a teacup; what we are saying is that the world is becoming less dependent on the American economy: China will perform an incredible 8% this year.
At the same time, OECD economies are less dependent on oil: for instance, the US will surely experience a contraction in some sectors, particularly in the automobile industry, but oil does not have the power it had in the Ď70s. The result is that World macroeconomics is less volatile, thus it can better absorb crises and slowdowns.
We think that it is time for some considerations.
There has been a considerable increase in world oil demand between 2003 and 2005 and this has stimulated prices and investments. Of course, investments need time, while demand is more rapid. That is why oil prices have grown like many other raw material prices: this is a cyclical trend, since raw materialsí supply curve is not linear but resembles a stairway.
What was a cyclical increase became a rocket due to false expectations on production capacities. Indeed, it was not a lack of spare capacity (even though we experienced a tight situation), but it was an overestimation of consumption forecasts that generated panic. In particular EIA and IEA exaggerated their estimate, and this altered expectations.
Doped expectations are the perfect fuel for speculation. Anyway, speculation is very short-sighted, thus we should not care too much about her.
Six months of extremely expensive oil (after four years of growth) have not caused recession or depression, but they will bring about a lot of restructuring in advanced economies. And if we recall Schumpterís lessons, this is good news.
This is not the end of cheap oil; but it is surely the end of America consuming (and wasting) most of the oil. Americans will probably slow their consumption trajectory. For instance, letís take a look at the automobile industry: in the next months we will see less SUV (even if they are benefiting from important sales) and more efficient cars along US freeways. This situation is pushing Detroitís Big Three to a radical restructuring, both in terms of vehicles (GM is thinking about electric cars) and production chain (Chrysler is even considering to reduce its yearly working days). Anyway, what looks as a curse for drivers, can be considered a blessing for the environment.
Eventually, we are entering an era of more diversified places of consumption: we should be happy, not worried.