If someone knows of a site full of interactive or animated supply and demand graphs let me know. Seeing how the shifting curves affect prices helps me.Charlie Sykes links to a series of animated economics tutorials. The one on supply and demand is most instructive for this problem (it also comes to grips with the confusion over "increase in supply" and "up," something my students know I'm fussy about -- an increase in supply is a right shift but the new supply curve is everywhere below the old supply curve) as it shows the price scissors at work. This tutorial -- and a lot of the commentary -- neglects a technical complication that is important for oil prices. I saw an article someplace mentioning how close current consumption is to current production of crude, which the writer interpreted as not much margin of error.
Partial credit. In a market in equilibrium, current consumption and current production are the same. The margin of error is in the ability of extramarginal suppliers to become suppliers should the demand materialize. Economists summarize that ability as "elasticity of supply" (yes, your eyes are glazing over, and the way most textbooks present the concept, properly so.) In the crude oil market, both the supply curve and the demand curve are somewhat inelastic, particularly in the short term. Thus relatively small changes in demand or supply lead to price changes large in proportion to the output change (a price increase of three percent, about $2 a barrel, calls forth a one percent increase in production holding the supply curve fixed and shifting the demand curve; in like manner a one percent decrease in production, shifting the supply curve and holding the demand curve fixed leads to a three percent increase in price. I leave the effect of a coup in Venezuela or a revolution in Nigeria or a nuclear accident in Iran to the reader as an exercise.)
There is a lot of useful economics commentary on oil prices around the web. Bear with me, and I'll provide some links.
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