Supply and Demand

I wrote this up because I've seen a fair number of odd arguments about drilling from the rightosphere. It was in response to a statement: "But we'll just ship all the new oil off to China! So drilling is pointless!"

What happens if we double US output, and every single drop was shipped to China? Stop reading me, and really think about it. The normal law of supply and demand - for normal things that you don't need (baseball caps, say) - is that when you draw a plot of "Price vs. Quantity". Wikipedia has a plot here: Supply and Demand Plot.

The 'free market price' is the intersection of S (Supply line) & D1 (Demand line) - it is (P1,Q1) initially. Any increase in demand is like moving the line D1 to the line D2. The 'free market price' moves along the curve to (P2,Q2). We'd be paying more, and consuming more. An increase in Supply moves the Supply Line. Imagine the S line being scooted down. Prices drop, and the intersection will be a little farther along the Q axis, so we'll be consuming more.

Now oil isn't baseball caps. We have a strong desire for oil, and we aren't too flexible about our usage. (We might knock off roadtrips completely, but fewer people will stop driving to work, etc.) This just means that the 'Demand Curve' is steep.

The Supply Curve is also steep - at-the-pump prices in the US have gone from $1.50 to $4 without any appreciable American drilling.

Now: An increase in Supply - even if it's going to someone else! - shifts the entire Supply curve. Even if China was able to consume all of the oil themselves, they would be changing their impact on the market. They stop pressuring Indonesia perhaps. Or relax export restrictions to Russia. Who knows. But any change in Supply causes the market to readjust - and the net effect would be the same as with baseballs: an increase in quantity, a drop in price.

We already know what the demand curve is going to be doing going forward. Both India and China moving into the middle-class and being able to afford personal vehicles pretty much swamps any discussion on that question.

Alternative fuels also affect supply, and alternative energy also affects supply. There's nothing wrong with investing in either. But these are NOT mutually exclusive options. We're in a hole that's big enough for us to jump on the nuke bandwagon, _and_ the solar/wind bandwagon, and the biofuels bandwagon, and still have plenty of demand to jump with both feet on Drill here, Drill Now, Pay less.