Friday, March 11, 2011

Dramatic demonstration of the law of supply and demand

     Oil, like any other commodity, is subject to the laws of supply and demand.  While those opposed to domestic oil drilling claim it won't make much of a difference if we open up more areas for domestic drilling, the facts belie that assertion.  President Bush in July 2008 by executive order lifted the ban on offshore drilling.   The results on the price of a barrel of oil were astounding.  Here is the chart:

To be sure, there were other factors, including the recession, which suppressed demand, but the price of a barrel of oil, as demonstrated by the last month's spike, is based in part on psychology, and traders who realized the US would be drilling more oil domestically helped to drive down the price of oil so that it was only $35.00 a barrel when Pres. Obama was inaugurated.   Pres. Bush's change in policy on oil drilling helped consumers at the gas pump.  Pres. Obama should follow Pres. Bush's example, and open up more areas for oil exploration and drilling.


  1. The Price of Gas is in a very big part because of speculation as the chart shows. When Speculators got cold feet the price plummeted..

    More drilling will not have nearly the effect that
    public opinion will have. IF we all say we are going to conserve then prices will go down because Speculators will not bid the price up.

  2. Speculators speculate based on what they think the market will do in the future. If government policy was to drill here in the U.S., speculators will bid the price down. When Bush opened up drilling offshore, speculators got cold feet. I don't think speculators will ever believe that Americans or anyone else will conserve enough so that demand goes down significantly. And energy use is more dependent on economic activity than individual households conserving. For example, a small plant in St. J--Weidmann--spends one million a year in electricity. If they expand with a good economy, their electricity use will outpace any conservation Vermont households may practice.