Sophisse

Recent Oil Spike: 'Irrational Exuberance'?

Your comment about fundamentals and India and China implies that an x percent increase in demand should bring about a linear rise in prices - x percent, or 2x percent, something nice and manageable.

But basic supply/demand theory says otherwise. When demand exceeds supply, prices don't necessarily rise in smooth proportion to demand. Prices are set at the margin, the last willing buyer, which means the price rises until just enough people say "nah, I don't want it at that price."

The real question is, has demand finally exceeded supply? If so then prices can spike in an econ 101 textbook manner, without any irrational exuberance. Nobody knows for sure, but we have 3 years of flat supply + growing demand, plus a price spike consistent with this situation. Why invoke irrationality when there is a simple rational explanation consistent with the facts?