Promoted. Ever since it was announced we were going offshore, the price at the pump has declined from $4.10 to $3.80. I blame Bush. -Patrick
Yet again, I got my blood pressure up by reading an article where someone breezily stated that since drilling wouldn't produce oil for years, it wouldn't affect the present price of oil. Here, in 90 seconds, is why they are wrong:
Suppose you had a hundred 1998 quarters. Now suppose you found out that on ebay, 1998 quarters were selling for $20 each. Would you sell them? You'd probably sell at least a few.
Now suppose that you knew that--one year from today---these same quarters would be selling for $100 each. Would you sell them today for $20, or wait a year for $100? Of course it's worth waiting one year to quintuple your earnings from $2000 to $10,000.
Now suppose that the price on ebay for 1998 quarters rose to $99 dollars. Now, it's not so simple. It's probably worth selling the quarters today for $9900 rather than wait a year for the extra $100.
In other words, the future price of 1998 quarters changed your estimation of the present value of the 1998 quarters.
But we could go further. If you knew that one year from now, 1998 quarters would sell for $100, and you saw them on ebay for $20, you'd probably buy them. As a matter of fact, you'd buy them at $20, $30, $40, $50, $60, $70 up to some number which reflected your confidence in the future price and your cash on hand. By purchasing these quarters, you'd be raising the current price of 1998 quarters in anticipation of selling them later.
Well, that's what they call speculation.
Now suppose that someone said that a year from now, he was going to release a million 1998 quarters onto eBay. Do you think the $100 price a year from now would go down? Of course! How much? Say you calculate that it would go down from $100 to $10. Now, what's the maximum price you'd pay for 1998 quarters today?
To sum up-- increasing the future supply of a scarce good will lower the current price.
Of course, there are other variables involved. It costs money to hold and store some things (such as oil). There is inflation. And in the real world, we have no guarantee on future prices, only educated guesses. But the essence is not changed-- future supply affects current price.