Magic in the marketplace

You are about to see magic again.

The magic is the matter of supply and demand. It is not really magic. But it seems so, because too many of us cannot be bothered to read any history. Too many will not pay attention even to recent history like the 1970ís.

In the 70ís oil sold for a low price. So gas was cheap. Neither had gone up with inflation. In other words there was a lot of supply.

And so, magically, demand grew. People drove big cars and trucks. They bought Winnebagos. They towed cars behind them. And boats behind the cars.

As demand grew, OPEC put on the screws. Demanded higher prices. Slapped an embargo on oil to punish us for supporting Israel.

In other words, supply shrunk, demand increased. Prices rose.

Everybody went crazy. Jimmy Carter slipped on his sweater. He dialed down the thermostat in the White House. Told us the country was sunk. Told us to forget about increasing supply. We could not drill our way out of this one. Told us most oil would be gone by the end of the century. (That was the official prediction from his administration.) Various other bleak folks predicted economic collapse. The government poured fortune into synthetic fuels.



Meanwhile, our consumption slowed. We insulated more. Bought smaller cars. Drove less. Tried car pools.

Miracle of miracles: Prices rose, demand slowed.

Along came Reagan. He said Carterís views were nonsense. He took restrictions off energy. Decontrolled energy prices.

Pretty soon, supply soared. Prices fell 75 percent. Net of inflation energy prices fell 90 percent. The very thing Carter said was utterly impossible. Because he had no faith in supply and demand.

With prices down we all went back to consuming more. Bought SUVís. Built and heated and air-conditioned ever larger homes. Built second homes. Bought giant Winnebagos. Towed SUVís behind. Bought Humvees. Bought ever bigger boats with ever bigger engines. Flew to see the kids at the drop of a hat. Magic: Supply increases, prices fall, demand grows.

In 1999 oil sold for $10 a barrel. In todayís dollars that is about $8. And major economists reckoned it would fall to $4. That was less than 10 years ago.

Magic. Prices fall, demand grows..

Texas oil patch guys went bankrupt. Drilling stopped all over the globe. Refineries closed because they could not make a buck.

Magic: With supplies down, demand grows, prices start upward.

Prices, as you know, have continued upward. And now we are where we were at in the 1970ís. Politicians claim we cannot drill our way out of this one. Tell us oil will hit $200 next month, $300 the month after.

Magic: With prices so high, consumption is beginning to fall. In March we drove eleven billion fewer miles than last yearís March. We are buying smaller cars and selling our SUVís.

Elsewhere countries are ending their subsidies that kept gas prices low. As they get hit with higher prices, people all over the globe are beginning to slow their consumption.

Magic: With prices so high, lots of folks are drilling for more oil, producing more. We are just about at the point where we the world will be producing more than its people are consuming. In other words, supply will increase. While demand is going down. Which will deliver lower prices.

Extra, extra! Read all about it. Magic in the market place. Who wouldaí thunk it?

From Tom ... as in Morgan.

For more columns and for Tomís radio shows (and to write to Tom): tomasinmorgan.com.

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