Take a look at oil prices over the last couple of months and you’ll see something interesting: its been stubbornly high over the last four months (> $100) despite the incredible $40 a gallon we saw just three years ago. Could it be market manipulation? Some people seem to think so, including the US Congress, which just unveiled a plan to increase penalties for market manipulation. Others seem to paint a much direr picture – that we have reached peak oil.

The concept of peak oil is a simple one. It states that global crude oil production has reached or is closely reaching its peak. And yet, this is clearly not a unanimous opinion. New sources of fuel such as fracking for American shale gas, biofuels like ethanol, hydrogen power, and several other sources. Canada’s oil reserves are greater than that of Saudi Arabia’s, and may suddenly become more accessible with breakthroughs in reservoir technologies. Despite the apparent sea of energy in the world, however, it seems that only the traditional fuel (Oil) from its traditional place (the Middle East) will continue to reign on the world’s energy prices. Alternative energy is vastly inefficient compared to Oil given that much of it takes more energy to create than it generates. Furthermore, many oil exporting nations have turned oil importers. Britain, Indonesia, and Egypt all fall into the recently converted. And one Petroleum Review’s contributing authors, Chris Skrebowski, has argued that spare capacity in the oil market could be eroded by 2015.

Several economists have tried to predict what might happen to the price of oil. Buttonwood, of the Economist, writes:

the conference Michael Kumhof, an economist at the International Monetary Fund, presented the findings of a forthcoming working paper which showed that adding the idea of a “Hubbert peak” to energy production greatly improved the ability of a model to forecast oil prices. Based on an expected 0.9% annual increase in production over the next decade, the model predicts that real oil prices will nearly double over the same period.

So is the era of cheap energy over? As the industrial age was built on new and innovative uses of coal, the time after WWII relied on cheap oil to stimulate the transportation industry as well as revitalizing factories. The answer to this question may not be an easy one to bear.

Now for something a little different. Most people using EconomIQ are here to understand economic data. And yet that no matter how quantitative you make your economic viewpoints – the field is still all about human psychology and prices. Sometimes psychology plays an incredible role. For instance, in the book “Nudge”, authors Cass Sunstein and Richard Thaler describe this example:

A study into the teaching of technical drawing in French schools found that if the subject was called “geometry” boys did better, but if it was called “drawing” girls did equally well or better. Teachers are now being trained to use the appropriate term.

Clearly, psychology plays an important role in our daily life, but doesn’t the market – with millions of participants – average out to complete rationality? The way people interact with prices give us supply demand curves, but the market has never been perfect – there is a bound to the rationality of people. This bound, is what behavioral economics seeks to find.

But behavioral economics is not a cutting edge innovation. In fact, Adam Smith, author or Wealth of Nations – the bedrock of classical economic thinking – wrote The Theory of Moral Sentiments, which describes his views on individual behavior and about fairness and justice. That’s all great and all, but how can something as soft as “behavioral economics” be applied in the real world? Well, a nudge in the right direction seems to help. The Economist gave this exceptional example of behavioral economics really improving the way people make decisions:

In one trial, a letter sent to non-payers of vehicle taxes was changed to use plainer English, along the line of “pay your tax or lose your car”. In some cases the letter was further personalised by including a photo of the car in question. The rewritten letter alone doubled the number of people paying the tax; the rewrite with the photo tripled it.

While plainer language may not seem revolutionary by itself, it is evidence that behavioral economics works and has the power to completely revamp how governments make laws about commerce, taxes, or anything else that affects behavior everyday. And that is no small achievement.

Is it up or is it down or has it gone just around? That’s generally the question asked by anyone wanting to know the state of any economic indicator. This is especially true for the Unemployment rate. Oh how markets rally and fall on the minute movements of the BLS’ most watched figure. Unemployment up by 0.5%? Grab your hardhats folks, this economy’s gonna blow!

But is it? While it is true that the unemployment rate (particularly the U3 rate) is important, what lurks beneath the surface underbellies the structural changes of how workers are changing jobs and how the  ebb and flow of the job market influences GDP.

More specifically, job-to-job movements – what economists call churn – have significantly influenced the economic flow of the U.S., at least according to a paper published by Edward Lazear of Stanford University and James Speltzer at the BLS. Churn is when an employee leaves one firm to go to another with no unemployment stint in between. This is generally associated with a 8% pay raise for the average American worker, but more importantly, it represents shifting skills to places where they are needed more. And as job movers improve upon their skills, and employers continually find better suited workers, the whole economy benefits. Thus an increase in churn is typically followed by an increase in economic productivity. Yet this number is not represented in the headline unemployment statistic, since no jobs were gained or lost, just employees moving from one hiring spot to another.

In our last recession (which many dub the ‘Great Recession’), churn fell from 8.4 million workers to 5 million. Authors Lazear and Speltzer indicate that this fall led to about 80% of the fall in hiring, which dropped from 12.8 million new workers to 9 million. The overall effect, the authors estimate, was a productivity drop of $208 billion solely due to the effect of churn.

Interested in knowing more? Economic churn and hiring are available through the BLS’ Job Openings and Labor Turnover Survey (JOLTS).