Wednesday, November 09, 2005

The Oil Price Explanation

The Guardian writes: "The chairman of the Senate energy committee, Pete Domenici, told them there is a 'growing suspicion that companies are taking unfair advantage' of crude prices that recently touched $70 a barrel. 'The oil companies owe the country an explanation.'"

Here's the explanation.

Economics 101

In spite of the fact that Opec as been running at or near record production, demand for oil was increasing faster than supply. When the demand for widgets grows faster than the supply of widgets, the price of widgets goes up and so do the profits.

If you want to see gasoline shortages, legislate lower prices. Also, I'm afraid things are going to get really interesting shortly after we hit peak world production. The good news is that in the near term, demand has been slacking off a bit and prices have been receding.

Update (11/15): "Economics 101 supply-and-demand curves are apparently too complicated for lawmakers to understand." -- Washington Times

Update (11/16): "Many of the same factors that drove world oil markets in 2005, such as low Organization of Petroleum Exporting Countries (OPEC) spare oil production capacity and rapid world oil demand growth, will continue to affect markets in 2006." -- U.S. Department of Energy



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