Wednesday, April 23, 2008

And While We're Talking Economics

I made a handy little graph to explain what's happening to oil prices. Ditto gas.

...since the picture isn't worth quite a thousand words, apparently... Basically over some range of the supply curve (marked S), firms are willing to increase the quantity supplied without charging much more. That's the flat horizontal section of the upward sloping curve. More oil can be easily pumped out of existing fields, or gasoline refineries are running below capacity. Eventually you get to a quantity where no more oil can be pumped out of the fields, or gasoline refineries are at capacity. Then increases in demand (rightward shifts in the demand curve marked D), lead to sharp increases in price without any noticeable increase in the amount of oil or gas supplied.

Over time, perhaps, more oil fields can be brought online (though probably at higher cost/barrel than existing ones) and more gasoline refineries can be built. But over a relatively short time horizon, once you hit capacity the sky is the limit on the price.