Oil and the Market Economy

What does the cost of petroleum mean? Generally, in the market economy, the cost of a product is very closely related to its supply and its demand. As the supply dwindles and the demand stays the same or increases then the cost goes up. So goes the price of petroleum for most of the previous three decades especially with a cartel in place that limits the supply of petroleum. Except the cost of petroleum over the previous year and a bit has drastically dropped.

Do you believe that production has risen? Well actually it has. Globally the production has risen year over year since the 1980s. There’s nothing really noticeable about production in the last two years. How about petroleum consumption? Well, it has also risen, about every year except 2008. Of course, the economic game is for the rate of production increase to slightly lag the rate of consumption increase. Doing this means that supply is always, slightly insufficient. It’s a great game for the producers as long as all players keep playing the same. But if the producers flood the market and the consumers find energy from elsewhere then, as we see, the price decreases.

In response to falling prices, the producers ramp up petroleum extraction to maintain their income. The lower cost encourages consumers to consume more. Again, this is typical economics. But, what if the resource is non-renewable as with oil? What happens when the producers have nothing remaining to produce and thus no resources from which to make profits? And what happens to consumers when their way of life ceases. How will people react then?
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