The Problem With Increasing Oil Supply Now

There is bound to be a bigger push on the Congress and the President to do something about the high oil prices. On an election year, the candidates wanting to show they care, get in the fray with their own recommendations like Gas Tax Holiday.

A common theme across all these plans is they either seek to increase supply or reduce total price.The supply increase is recommended through, more drilling in existing fields, open up new fields in protected areas, stop adding to strategic reserve.The price control methods are just that, seeking to introduce price control, windfall taxes and eliminate taxes.

The problem is the shock is demand induced and not a supply shock. The demand is global is nature and not limited to US. When the prices rose first, it was a shock. Now people, across the world, come to expect the higher prices are here to stay and are changing their behavior like using public transit, using cattle for plowing the field (India), or working from home one day a week.

Not everyone is doing this but enough to put a dent on the demand. If the lawmakers choose to address this demand side problem by increasing supply, the demand will only increase to absorb the added supply. The price of crude is at its market clearing price and not spiralling out of control because people can make behavioral adjustments.

Adding new supply will negate these and will keep the prices at their current levels or higher and not push them any further down.