demand supply: oil prices redux

[Pottree@domain.elided]

In a message dated 03/21/2000 6:52:06 PM Pacific Standard Time, 
owner-alfa-digest@domain.elided writes:

<< I am curious: with the price of
 oil climbing due to a cutback in production, how is more money available to
 the countries that produce if less is produced?  With production increasing,
 prices are going down...  Pesky that supply and demand stuff...
  >>

I also had an economics class that explained the wonders of supply and 
demand.  Then I grew up and found out in business that wasn't the story.

Oil producers (lucky holders of commodity) may wish to reduce production now 
to withhold product not so much to stimulate a current price increase as to 
hoard the commodity for sale later, when prices may be better for them (or 
worse; it's gamble).  Or they may want to blackmail trading partners for 
other concessions on volume, prices, a host of other issues seemingly not 
related.

Or just rattle some sabers for internal consumption, much as we in No. 
America appear to view Russia's actions in Chechnya.

I recall the days of the Big Oil Crisis, which lead to a decrease in demand 
for Detroit's dinosaur land ships.  According to school, they would lower 
their prices to encourage buyers, but actually they raised their prices so 
they could try to make the same $ volume of sales on a smaller unit volume, 
thus attempting to insure the steady stream of their quarterly bonus checks.

A boost from $20 to $30 a barrel for midEast crude of course will have a 
ripple effect on taxes that are a % of a sale.  But if supply and demand is 
such a vaunted law, instead of fulminating on the increase in price at the US 
pump, why not react by using less?  

Someone driving a (not needed?) SUV may be facing $300 or $500 more a year in 
gas costs.  I believe most of these drivers, and especially those with the 
most guzzling vehicles, wouldn't really care because this is not a 
consequential amount of money, especially compared to a vanity vehicle in the 
US $30K - $40 range.  

Business fuel users, such as cabbies and truckers, are in a different boat 
(well, I guess fishermen and ferrymen, too!).  To them, the increase is a 
cost of doing business, and reduced driving may not be an option.  But for 
them, the increased cost should be offset by a larger deduction on income tax.

I must agree, with a GTV6 and 2L spider in the garage, that I am not terribly 
sympathetic to those who think the whole reason there's a fuel cost increase 
in the US is that our government is an evil occupying force out to gouge us 
and limit our freedoms.  If the folks who scream for an offsetting reduction 
in state or federal gas taxes got their way, would they also be in favor of 
increasing those taxes again once the current increase in underlying 
commodity costs are reversed, in 6 months time?

No, I didn't think so.

But then I also think the producers are actually being prodded by Alan 
Greenspan, who will do anything to try to put the brakes on the surging US 
economy in order to protect the asset value of those who HAVE at the expense 
of those who PRODUCE or EARN.  But that's another issue, perhaps not for this 
forum.

Charlie
LA, CA, USA

------------------------------