Posted by
Matthew on Tuesday, June 17, 2008 9:11:00 AM
Somehow your Intro to Econ classes must have skipped over this basic principle in economics. Maybe the professor is a free-market-denier. Maybe you were busy texting the chick three seats over that day. Who knows.
But somehow, this concept didn't get through. So I'm here to help. And no, I'm not from the government. I'm from that old school of thought that ordinary citizens can be helpful.
Let's start with why I think this concept needs to be addressed. I read a story this morning in the Washington Post in which presidential contender Barack Obama's spokesperson said,
"John McCain's plan to simply drill our way out of our energy crisis is
the same misguided approach backed by President Bush that has failed
our families for too long and only serves to benefit the big oil
companies."
This is faulty logic on two fronts (at least), as well as an awkward and predictable attempt to wed McCain to Bush in an area where they have held different views. But let's focus on the economic reality of supply and demand.
The iPod was once a unique device. When they first came out, people paid hundreds for ten dollars worth of parts. Apple could charge an arm and a leg because they were nearly alone in the digital jukebox business. Now you can find a knockoff of the iPod at any number of stores for $15.
Why are they so cheap? Multiple reasons, but the primary reason is that now there are more.
The iPhone is experiencing similar downward price pressure because there are other phones coming to market with similar features.
The more of something there is, the less people are willing to pay for it.
Oil comes from a limited set of suppliers. The US sits on a huge stockpile of oil, but environmental groups have pressured the Congress to prevent us from tapping those resources. The environmentalists' view is that the deer and the antelope won't have as many places to play if we put in some drilling rigs. But the majority of Americans are a little less concerned about the deer and the antelope at the moment than they are their own livelihoods.
There are plenty of arguments to be made about whether our lifestyle is a little out of control, but the focus here is on the pressure that a limited supply has placed on the price of oil.
In short, less supply equals higher price.
The current price structure in the US is in part a response to speculation about oil futures. Every article I've read about the futures market cites "supply fears" as what is fueling the higher bidding on oil futures.
So what does one do to alleviate fear about future supplies? You increase future supplies.
Think of it this way: Suppose you had expressed your concern about being able to afford college to your parent(s) or legal gaurdian(s) back when you were in sixth grade. If he/she/they had said, "Don't worry. I'll take care of it," you may have felt some assurance. How much more assured would you have felt if he/she/they had established a savings account with regular deposits to cover your college expenses? In this case, the supply of money would ease your fear of future calamity, reducing your tension and letting you get back to your baseball card empire.
Similarly, if the US were to ease restrictions on drilling within our borders and territorial waters, the futures traders would no longer have fears about our future supply. And in a short time, we would have a greater current supply. Oil has proven itself to be supply-elastic, meaning that the price of oil has been affected, dramatically, by the supply on the market. See the Arab oil embargo of the 70's for details.
One other thing that I want to point out about the comment from Obama's campaign staff: Read it slowly and you'll see that it makes no sense.
Logic fault 1: '
misguided approach ... that has failed our families for too long'. We haven't tried this yet. When did this approach fail?
Logic fault #2: '
that only serves to benefit the big oil companies'. How does big oil benefit from lower prices?
Class dismissed.