Ed / Supply & Demand
It's been a while since I tutored economics, but let me take a stab at your question.
To start with, I'll assume you're thinking about the traditional presentation of supply and demand in undergraduate courses. You know, where the supply "curve" and the demand "curve" are shifted about depending on various changes (income, population, etc.) ceteris paribus. That kind of analysis is known as comparative statics.
The real world, of course, is dynamic, not a series of set-piece static representations. So even if we knew what the supply and demand curves looked like at any given time (which we do not), time and exogenous events complicate the relationship between supply and price. Time in at least two major ways. One in that demand depends on the season (driving), weather (heating), and business schedules (declines when major users are down for maintenance, etc.). The other in that the longer the time frame you're talking about, the more oil consumers have the opportunity to substitute, e.g. to gas.
Supply & demand is a very simplified pedagogic tool that abstracts so far from the real world that it has to be used with caution. But more importantly, we simply don't have all the information. Our information on supply and demand are gross estimates -- sometimes more gross than others. Remember the "missing barrels" from late '98 and early '99? There was supposed to be this vast amount of inventory floating around the world that was going to hold prices down for years even if production was cut back. Then they decided that they'd made a mistake, and struck off 400 million bbls. or whatever the number was. Bottom line seems to be that the price on any given day is set by the outcome of perceptions on the NYMEX of the supply/ demand balance, not the nice neat intersection of two imaginary curves. The balance of worldwide supply and demand is something you can maybe talk about in hindsight.
FWIW
<edit> Sorry, Jack -- if I'd waited another few minutes, I could have seen your much better reply and not bothered. |
