Supply and Demand Friend or Foe

Supply Demand

Supply, Demand, Oil and the U.S. Economy

Few forces have a greater or more direct impact on the U.S. economy than the global oil trade. The industrial expansion of the American way of life has been largely dependent on an ever-greater consumption of gasoline, the vast majority of which must be imported from other nations. The result is a tumultuous history of oil trade both in terms of economics and the political and military conflicts that often accompany these economics. For the U.S., the increasingly tricky balance of oil supply and demand has had and will continue to have an increasingly profound impact on our economic affairs. Indeed, as recent headlines show, there is a close correlation between such dimensions of the U.S. economy as its continued economic stimulus program and the supply and demand of oil on the global market.

The recent article by Gorondi & Sampson (2013) underscores this correlation, reporting that a recent announcement by the Federal Reserve had an immediate impact on global oil prices. Because oil prices fluctuate widely according to shifting levels of supply and demand, specific policy decisions can actually be felt at the consumer level through the cost of filling up at the pump, heating one's house or running one's business. To the point, according to Gorondi & Sampson, "the Fed was widely expected to begin winding down its program of buying $85 billion a month in bonds and other assets. Instead, the central bank said it will maintain the pace of the bond purchases because it thinks the economy still needs the support.t (p. 1)

This economic stimulus strategy has had the impact of infusing the U.S. economy with a greater sum of moveable cash. This, in turn, is encouraging a return to steady growth among private enterprises. As has been the habit of the U.S. economy, greater productivity requires greater sums of petroleum. As such, the Gorondi & Sampson article reports, the supply of oil has declined over the last month, leading to higher prices per barrel and, consequently, higher everyday expenses for the American consumer.

An article by Sampson et al. (2013) further elaborates on the direct link between the economic demand for oil, the reduced supply of the commodity and the resultant price spike in said commodity. According to Sampson et al., these factors have contributed to the anticipation of higher oil prices in the approaching month of October. The article reports that "oil was showing a slight gain in the morning but rose further after the government said that supplies of oil and gasoline each fell by 1.8 million barrels in the week ended Aug. 30. The drop in gasoline supplies was greater than expected, and refinery usage increased, both signs perhaps of solid demand for fuel at the end of the summer driving season." (Sampson et al., p. 1)

What is taking place today is part of an inextricable cycle upon which the robustness of the American economy has been at least somewhat dependent since such innovations as the U.S. automobile industry and the construction of the highway system. American dependency on oil, specifically that from foreign sources, has come increasingly to impact the nation's economic fortunes, with some economists even issues foreboding warnings about the not-too-distant future. The matter of supply and demand, some argue, will reach a point of critical mass in the coming years as the supply of this finite fossil fuel continues to dwindle.

The article by Ahmed (2013) describes the phenomenon known as 'peak oil production,' which indicates that the global community has reached and will surpass its peak capacity to produce oil cheaply and efficiently. The result will be global shortages in supplies of the commodity and sharp spikes in pricing with potentially damning effects for the whole of the world economy. The article by Ahmed suggests that we may already be reaching that point. According to Ahmed, "Global production of crude oil and condensates... has essentially remained on a plateau of about 75 million barrels per day (mb/d) since 2005 in spite of a large increase in the price of oil. Even more important, the global net oil exports from oil-exporting countries (oil production minus internal consumption) have peaked and are in decline." (p. 1)

This is an alarming reality and one made all the more so by the genuine disinterest shown by leaders of the U.S. economy to alter our current course. The level of dependency of the U.S. economy upon oil supply and demand is troubling to say that least and, at this juncture, increasingly shortsighted. In the near-term, evidence of this problem is highlighted by the continued instability in the Middle East. As the most prolific oil producing region in the world, the Persian Gulf and North Africa have drawn much attention, involvement and occupation from the industrialized world. And evidence demonstrates that events in these parts of the world are felt in no uncertain terms by consumers in the United States. In fact, there is a high level of reciprocity between events in this region and patterns of consumption among U.S. motorists and homeowners. Our summer vacation habits frequently coincide with tumult and crisis in the Middle East.

So reports Stonebraker's (2013) informative explanation of oil supply and demand as effectors of the U.S. economy. According to Stonebraker, "increased demand from U.S. motorists, from other countries, and from speculators worried about even higher prices in the future, coupled with supply cuts in Iraq and Nigeria caused oil prices to increase. However, by late 2008 problems in U.S. mortgage lending set off a crisis in global financial markets that led to a global economic slowdown. The slowdown, in turn, caused a drop in demand for oil and began pushing the price of oil back down." (Stonebraker, p. 1)

The economist here effectively illustrates the core problem that finds its way to the headlines on a daily basis. Namely, American dependence on foreign oil is an economic effector that we cannot truly control. As such, we are at the mercy of its many fluctuations and variations in availability. Stonebraker demonstrates as much in his discussion, which describes the rapid fashion in which the commodity can rise and fall in short order. According to his report, the fall in oil prices in 2008 as a consequence of the sagging U.S. economy would incline those holding large stores of oil to unload it cheaply on the market. The flood of supply, according to Stonebraker, drove the price of oil down from $140 per barrel in July of 2008 to $40 per barrel in December. (p. 1)