The WSJ reports that oil exports from top producing nations have continued to drop, even as the price of crude has shot up dramatically. Their assessment: it is "a shift that defies traditional market logic and looks set to continue."
"Traditional market logic" suggests that where prices rise and demand is constant, more of the demanded product will be produced, bringing supply and demand into equilibrium. However, the opposite is taking place: supply continues to drop. Again, the WSJ: "Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well."
Even if "traditional market logic" does not seem to be working, Mr. Market is indeed telling us something: the price of oil is rising because it appears that there is less of it. The logic - if not "traditional" - that IS working is that we are experiencing higher prices due to less supply. "Traditional" market logic appears to be based on the belief - or fantasy - that because something is in demand, it will appear. The actual "logic" at work is that once when supplies become constrained, prices will inexorably rise. That the traditional "logic" is not working may puzzle some, but only if one believes that the market can actually create something. It is simply not "traditional" because it's something we haven't seen before. And, it's likely that what is referred to here as "traditional" logic - rising supplies to meet any demand - only applies when there are ample supplies of energy. Going forward we're likely to see a different kind of market logic - a logic of less, not more.
This new logic suggests different sorts of behaviors than one's we're accustomed to seeing. There is growing evidence of "virtuous" behavior among Americans, cutting back and using less. Of course, this contributes to an ongoing economic downturn: the "virtue" of the citizenry is the consequence of want. Good habits may form, but at the moment choices for smaller cars and more public transportation, as well as fewer purchases of various foreign-made plastic products, are likely to be evanescent if higher energy costs don't persist.
We are seeing the rise of other behaviors as well - ones decidedly less virtuous, and more likely to increase as we become poorer. There are rising incidences of gas theft - including even used cooking grease - or even taking to the streets in Europe, giving rise to anxiety and concern in world capitals that permanently rising oil prices could lead to severe political unrest. Everyday the newspapers are revealing new ways that higher fuel prices translate into economic and ultimately political stress, and the sanguinity of our reliance upon "traditional market logic" - i.e., the belief that if we want it, it will appear - appears less a sound economic presupposition than a touching if naive and dangerous faith.