Supply and Demand is inexorable, no matter what governments and non-free markets try to do. Inevitably a lowered demand will drive down price. As will an increase in supply. We are seeing both occur.
The price of oil seems to have begun a retreat, as demand has fallen sharply. I have written about the reduction of gasoline use several times, including in this post. Now we see the price of oil back to the low $120/bbl range, and a set of oil price reduction events in place that will gain in momentum. They are:
1) reduction in miles driven
2) increase in mileage of the entire US auto fleet
3) relaxation of constraints on drilling in the US
These three things will act to further reduce oil prices. If this continues, the pendulum will swing so far that oil companies will be dis-incented to develop more costly oil sources, and the cost of gas will go below the number that compels conservation, and we will be right back where we were, on the edge of a problem. Irwin Kelner, Chief Economist at Market Watch agrees in his recent column.
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