Ireland Tries Vox Clamantis in Deserto

On Friday, Ireland held a referendum on a new treaty -- the so-called Lisbon treaty -- defining the role of the European Union. The treaty was soundly defeated by Ireland's voters, 53.4 to 46.6. This "should" doom the implementation of the treaty, which had to be ratified by all countries.

A couple observations. One, this significant event has hardly been picked up at all in the US mainstream media (hence my "voice crying in the wilderness"). Why the lack of attention? I suspect it has to do with the fact that the mainstream European governments do not really want to talk about it, hence the media is not picking up on it. It is a very substantial event.

Second, related, set of observations. This latest attempt by the European Union to pass a new treaty follows the defeat by French and Dutch voters in 2005 of the even more aggressive new constitution. This time, the new treaty was structured so that it needed only be approved by existing governments, not directly by the voters...except in little Ireland (less than 1% of the EU's voters). One could view this in different ways. One could say that the treaty is simply too complicated to be considered by voters, and therefore it should only be voted on by elected ministers and representatives. My preferred view is to say that the EU officials tried an end-run around the EU's voters, and almost got away with it. They know that citizens are doubtful of the benefits of a larger European government and prefer a regime that maintains autonomy and cultures. From a political choice viewpoint, a large group of beneficiaries of the EU treaty would be, guess who -- government officials. So if you leave the voting to government officials, should we doubt that the treaty will pass? But if you let the folks vote who will pay for the expansion of government, you get the Irish outcome.

It is interesting to see the machinations already beginning to find a way to implement the treaty even with the Irish veto. This just proves why voters should be distrustful of the EU regime: voters reject a treaty TWICE now, yet the bureaucrats, convinced that they are right, just keep moving forward.

Vox Clamantis in Deserto.

Obama's Opportunity is Slipping Away

It seems to me that now is the time for Obama to surge ahead, with some significant speeches, announcements and press. He just nailed the Democratic nomination, and that is indeed an accomplishment of historical dimensions. He should not be letting the media discuss this in a vacuum, which right now appears to be the case. He should grab control of it, right now, and not let the momentum from this slip away. A VP selection of historical dimensions would work -- if it was the right person (who would that be?)

If we go a couple more days without something really significant from the Obama camp, I will put it down as a truly missed opportunity.

Limited Oil Demand Response

The International Energy Agency, IEA, has been cutting its oil demand forecasts, albeit only slightly. I suspect that they are lagging in this regard. See here for a recent update.

Also surprising that they are cutting their forecast of non-OPEC supply. At $130 per barrel, I don't understand why we are not seeing a significant increase in quantity supplied.

Oil Prices and Their Impact

The oil market continues to amaze and bewilder me. As I argued to a friend yesterday, it is not so much why prices are high today, but why they were so low for so long. After hitting the mid- to high-30 dollar range in 1979, we saw the nominal price of oil fall to around $10 per barrel in 1999. The theory of exhaustible natural resources (a la Hotelling) would predict that the real price should increase at the real rate of interest (actually, the price net of marginal extraction cost). With 1979 as a base, that theory currently fits the data quite well: using the CPI as our inflation measure, a $35 price in 1979 becomes $100 in today's dollars; growing that at 1.5% as an estimate of the real rate of interest over the period would yield a price today of $156. Not too far off.

So again, what is surprising is why prices were so low for so long, and why all of a sudden they have increased by so much.

I still am amazed that we are not seeing more demand elasticity than we are. I suspect it will kick in. Along those lines, this article has a quote from John Casesa, who was one of my students in 1984-86. He now runs an auto industry consulting firm. John notes that the auto industry is changing forever: "The trend away from these vehicles (SUVs) is irreversible."

Thus, once the longer term demand effects kick in, with a whole range of consumer and producer substitutions away from crude oil, the reductions in demand will be permanent.

Soon, I will do a posting on a possible explanation for the sudden increase in oil prices that relies on this permanent and significant set of substitution effects. I will present an argument that once certain forces pushed the price of oil past a certain level, the desire by some oil producers to keep prices low to enhance future demand disappeared.

The story is complicated and I am not sure I am all that comfortable with it, but it is worth pursuing.

But for now, let us economists just sit back and watch economic forces at work.