On the way into the office this morning, I heard a news broadcast complain about the record broken today in oil ($126 a barrel, the highest ever). My ears perked up but was let down when this reporter said, “One of the causes is supply and demand.”
One cause? What other cause is there that makes oil go up in price?
There are some economically-ignorant people out there–some in high political places–who spend a lot of time and energy (no pun intended) trying to point to other reasons other than supply and demand that raises the price of oil. Hillary Clinton recently lashed out at OPEC cartel for fixing prices, and her opponent Barack Obama chose to lash out at oil companies. The reasoning is simple in their minds: surely gas prices would come down if those oil companies would let go of some of their record profits. Try telling that to their shareholders.
Knowing the economic reality of supply and demand brings my politics into a most comforting place. First, supply is the amount of oil we have access to. America is extremely limited on its ability to extract the oil that it has. Colorado, where we live, is an oil-rich state that has several environmental limitations that makes it difficult to drill for oil, natural gas, shale oil, etc. Over 500 billion barrels of oil sit underneath ice in Alaska that environmental laws restrict companies from extracting. Democrats aren’t the only ones ignorant of this economic reality: McCain likewise opposes ANWR drilling and even off shore drilling. Supply within America may not be limited, but our access to that supply is.
Most of our oil supply comes from outside the United States. Hillary is somewhat correct in saying that OPEC is a cartel, but it is a stretch to say they “fix prices.” Instead, they restrict supply. It is economically ignorant to say that OPEC restricts their supply to raise the prices. Not possible. When prices rise, less oil will be bought. It is an economic reality, and OPEC knows this full well. That is, of course, the countering economic reality sets in…demand.
The western world and its growing Asian counterparts demand oil more and more. OPEC can restrict production, but if the western world continues to demand the oil, guess what happens? The price goes up because the supply is limited. In President Bush’s first-ever Internet news interview, he made the observation, “The truth of the matter is that in order for there to be a substantial change, either consumers have to change their habits … or there has to be an increase of supply.” OPEC doesn’t make more money because they are selling less, and neither do the oil companies. The record profits aren’t because the prices are going up; it is because Americans (and the rest of the world) keep demanding more and more oil.
“Okay, Jeub,” you ask, “where are you going with this?”
My main concern isn’t with politicians or oil companies or shareholders. My concern is with moms and dads trying to raise their children. Personally, I need to restrict my use of gas, as I’m sure you are feeling the need to do so also. This is the main reason we are selling our bus and why it has been parked for nearly a year now. As the price of oil effects the price of food, Wendy and I are concerned with frugal living and restricting our grocery budget. This is why Wendy wrote Love in the Kitchen and why we both were asked to travel to MACHE and speak on Cheaper by the Baker’s Dozen.
When a family unit sees supply and demand for what it is, two things happen. For me personally, I stop getting all hot and bothered at the profiteers or the politicians. You’ll not hear a Jeub say, “Those darn oil companies!” You may hear us complain about the politicians, but it is usually when they make foolish policies that try to manipulate the laws of economics. Good politics would be to invest in alternatives to oil and likewise remove unreasonable restrictions from access to the oil we have. It seems that today’s politicians are not interested in doing either (see article here).
A more important result of a healthy view of supply and demand is when families begin taking control of their finances responsibly and (hopefully) profitably. When gas prices go up (and they predict to get much worse), take steps to reduce your personal demand. This isn’t depressing or shaming, but rather liberating. Be wise like the shrewd businessmen at Shell Oil are being: make sure you come out in the black. Take more time searching out the lowest cost in gas and food.
I have always said that economics is as sure as gravity, and that’s why I can confidently say that the Jeubs will be all right. And so should you and your family! This economy is tough, sure, but that will only lead to a shake down that will reveal two kinds of families. First, there will be those who refused to adapt their lifestyle to the economic pressures of the time, and they will likely be enslaved in debt or ruined financially. Second, there will be the prudent who adapted to the old fashioned law of supply and demand, and they will likely be moving on with financial freedom and opportunity.