So, word on the street is that supply and demand is at it again. Fuel prices keep rising and those airplane tickets keep costing us more. Market forces are supposed to be pretty straight forward; we’ve learned in Econ 101 how this works for years now:
The marketplace forces of supply and demand determine the price of fuel. If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices.
Fair enough. But what’s with higher prices if all this supply is sitting out there ready to be drilled and sold at a hefty price?
The Green River Formation—an assemblage of over 1,000 feet of sedimentary rocks that lie beneath parts of Colorado, Utah, and Wyoming—contains the world’s largest deposits of oil shale. USGS estimates that the Green River Formation contains about 3 trillion barrels of oil, and about half of this may be recoverable, depending on available technology and economic conditions. The Rand Corporation, a nonprofit research organization, estimates that 30 to 60 percent of the oil shale in the Green River Formation can be recovered. At the midpoint of this estimate, almost half of the 3 trillion barrels of oil would be recoverable. This is an amount about equal to the entire world’s proven oil reserves.
So if demand is down and supply is up, why aren’t prices ultimately falling? It looks like the answer is not in our Econ 101 class afterall, but Econ 201:
The biggest threat to oil prices isn’t excess supply, uneven demand or slowing global growth. It’s the rise of the U.S. dollar.
Transportation costs are already high enough. Public policy should always favor a strong U.S. dollar. It’s of the highest importance if we’re to ever increase economic activity through international and interstate commerce.