Supply, demand and uncertainty: a modest proposal for oil consumers

July 29, 2008|By Tom Moriarty

Supply and demand - the yin and yang of the modern world, the nemesis of Homo economicus, the most basic principle in all of economics - is really quite easy to grasp. When demand is high or supply is tight, prices go up. When demand is low or supply is plentiful, prices go down. That's why the Hannah Montana Non-Stop Dance Party CD will cost you $14.99 on Amazon, while my band's latest offering, Will Rock for Food, is free.

The same basic principles are behind the high price of oil. Surging demand in emerging markets such as India and China have squeezed supplies, leaving less of the stuff to go around. And when times are tight, even the smallest disruptions in supply, such as unrest in Nigeria or a tropical storm in the Gulf of Mexico, will cause drastic increases in price.

In the oil markets, however, supply and demand is only part of the story. The other part is uncertainty - supply and demand's less popular but very influential older brother. Uncertainty distorts supply and demand, and it has been working against us in the oil markets for years. Uncertainty has convinced us that Iran's nuclear ambitions, impending strikes in Brazil, and the Wild West nature of doing business in Nigeria will inevitably lead to a major disruption in supply, and we better stock up on oil while we can, no matter what the price. In this crazy, distorted market, we lose every time we fill up at the pump.

But we're not helpless. Supply and demand is not some immutable law of physics, an irresistible force like gravity that pushes us around like pinballs. Supply and demand is a mathematical synthesis of human behavior, a reflection of what we choose to do in the marketplace. It is a distillation of ourselves in economic terms - no more, no less. We are not acted upon (or put upon, as the case may be) by supply and demand. We are supply and demand. And with a little effort, we beleaguered oil consumers can put it to work for us.

Sure, we could simply take the time-honored step of embracing good old-fashioned conservation. But why stop there? Why not get creative?

My fellow oil-addicted Americans, it's time to invest in the uncertainty business.

Remember, oil is traded on futures markets, and futures contracts lock in the price for delivery on a specific date, generally 60 to 90 days from now. If you invest in oil and the price goes up between now and the delivery date, you win. You can resell that barrel of oil at the higher price and pocket the difference. If the price goes down, you lose. You still have to resell that barrel of oil at the lower price, because what are you going to do with a barrel of oil? (Unless you happen to own a refinery.)

We can introduce uncertainty into the futures markets with just a little bit of murky market manipulation. All we need to do is form a consumer cartel (or cabal, if you like something that sounds a bit more sinister).

Membership in our group will be free and open to all drivers. Members will agree to participate in three to five randomly scheduled "gasoline holidays" a year - weeklong periods in which we'll all agree not to drive, or at least do our best to drastically cut back.

We'll walk, carpool, take the train, call in sick. Whatever.

The sudden drop in demand will cause a softening in the markets and a corresponding drop in the price of oil. Investors holding oil futures that come due that week will be in a world of hurt. After one or two such experiences, investors will get nervous and the price of oil might drop in a more permanent way - because they'll never know when we plan to strike next.

At this point, you're probably wondering: What should we call our cartel? It has to be a clever name, easy to remember, and original too. I'm thinking OPEC, for Oil-shocked People Exercising Control. You'll get a newsletter, maybe some coupons, too, when you join.

But, what's this? You're worried about the legality of our plan, what with concerns about market manipulation and all? Hey, don't sweat it. Oil companies and exporters have profited from uncertainty on the supply side for years, so I'm sure it's OK. It has their seal of approval.

Tom Moriarty teaches writing and rhetoric at Salisbury University. His e-mail is tamoriarty@

salisbury.edu.

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