@BAllanHansen

Sunday, March 18, 2012

Bad Economics: Krauthammer on Oil Prices

Charles Krauthammer criticizes President Obama for suggesting that "Drill, Baby, Drill" wil nott lowee oil prices. He writes: "So: Decreasing U.S. demand will lower oil prices, but increeasing U.S. supply willl not? This is ridiculous. Either both do or neither does. Does Obama read his own speeches?"
Who is right. On this point it is the president. Yes, price is determined by both supply and demand, but not everyone is a large enough part of supply or demand to influence the price. If I decide to stop working it won't change the salaries of professors. If I double the amount of eggs I consume it won't increase the price of eggs. Why? Because in each case I account for a small part of the total supply and demand. The U.S. accounts for a fairly small part of supply. In terms of proven reserves it was less than 2% of the world total 2009. On the other hand, we accounted for over 20% of world consumption. Thus, changes in U.S. consumption are more capable of influencing the price than changes in U.S. production.

All of this does not imply that we should not increase oil production. Domestic oil production will generate income and create jobs. It won't, however, lower the price of gas

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