Guzzle guzzle

My friend Priya sent me this a while ago:

"What is happening to the price of oil - has demand dropped do steeply!!! Isn't there a lag before the gas guzzling Americans change their driving habits..."

Since then oil has dropped to $42 intraday sometime last week and even Saudi Arabia's statement that it was indeed restricting output according to OPEC regulations barely put a dent in the decline for more then a few hours. I wrote this back:

"a) nobody knew for sure why it shot up so insanely. a good deal of this was a correction like in much of the commodity complex -- look at e.g. rice.
b) as the price of oil increased many companies and governments purchased more to have higher inventories when the price is even higher. That put additional upward pressure on the price.
c) the dollar is strengthening. that typically depresses the oil price (I'm never entirely sure why)
d) there is some lag in alternative energies gaining traction but 1.) we're seeing the first effects -- I mean, production of the hummer was halted, right -- and 2.) the mkt obviously anticipates the associated drop in demand and prices it in.
e) Some emerging markets with parastatal oil companies (e.g. Venezuela, Russia) rely on revenues to balance their budget. As the price of oil drops the incentive becomes larger to dissent from restricting output in coordination with other players (i.e. OPEC). Increasing output then decreases price. (but still increases revenue as long as elasticity is >1... which I'm sure it is.)
f) probably most important: we're pricing in a global recession. China's growth will slow form 10% to maybe 7%. The US is contracting, Europe will contract severely... Oil is in everything and as we contract demand for oil is destroyed.

that'll be $10, please."

So then this weekend I had brunch with some people who were very dismayed that gas prices were coming down b/c it delays development of alternative energies. I'm not sure if that's true but regardless those people are relatively privileged, white, middle-class, urban types (not sure what being white has to do with anything but it just kinda fits in) who don't spend a good amount of their minimum wage on gas commuting to work from the outskirts where they can afford housing (regardless that one of them claimed that she was "poor.") Anyways, I'd be interested to see what some of them think is the reason why oil shot up so much -- seeing that I, with some economics training have no clue and no argument really convinces me -- and why it's coming down again. Maybe I'll send out an email. Okay, bedime!