There’s loads of discussion about the high fuel prices at the moment. That includes the pain and protests that come from folks who find the high prices hard to cope with. That there will be some of these crunches is not surprising, and fuel is a good example since production and usage are virtually inelastic in the short term, so correcting for supply and demand imbalances is mechanically bound to have large price movements.
What I find interesting in this case, and others such as food prices, is the lack of any useful guidance for ordinary people before these crunches hit. This guidance would be very helpful in assisting consumers as they make high capital cost decisions such as the car to buy and how far from their work/schools they should live.
I have three specific things in mind here. One is a fan chart for fuel prices very similar to the one the Bank of England does for overall Retail Price Inflation (See latest below or here for more info). That would show people the core forecast that took account of things like emerging market consumption or base production. It should also be adapted to show some specific scenarios in the good and bad outcomes – for example, the loss of one or two major fields or refineries in the bad scenario (I’m struggling to think of near-term potential good news scenarios!)
The second would be guidance on oil shock impacts – for example, that the time for supply side correction is ~5-10 years, and that 50%+ rises could be required to moderate demand. It would need to be in a user-friendly format to help widespread understanding. But, that would help people understand the cost to them personally of managing a shock, and to be able to make decisions such as the level of fuel efficiency they need from a car, or the amount they should budget for transport. That is required separately from the first since the timing of a shock may not be very accurate a year or three out, but the scale is much more predictable. And, it will help people avoid underestimating how big the shocks can be.
Lastly, a simple way of using the information to make decisions is required, since the guidance on probabilities needs to be turned into a decision. Could be as simple as a web calculator that uses base information such as weekly mileage and car type and turns it into a cost model with probabilities that the running cost breaches a user defined level.
Of course, an alternative is to simply accept that corrections are painful, and live with it. But, it doesn’t feel like it would be too large an investment to make to assist those who wanted the assistance.
Edit – there is an interesting article on oil pricing, showing how hard it is to forecast, at http://www.dallasfed.org/research/eclett/2008/el0805.html. Interesting to note that this document includes information on future prices and how those move over time … but not on the sensitivity of the prices outlined above which would help make decisions (probably as the futures prices are not modelled, they are the real futures prices).