Supply and Demand

During my time at Berkeley getting my MBA there were two professors that peaked my interest in economics and corporate America. I am going to write a series of articles covering various topics related to my interest and what I have observed from many years in the corporate world.

I tend to look at things in very simple ways, that way I can understand the relationship between various elements of the overall system. For me economics all comes down to the law of Supply and Demand. It is quite simple; if you have something that someone else wants you control the price. If there is a large supply then one has to sell at a lower price. Look at gas prices. The oil producing countries attempt to control the supply to match demand so that they can get the maximum dollar for all of their oil. Along come the speculators who basically add a bit of Las Vegas to the equation. They are all betting on whether the future prices will go up or down.

This does add an interesting element to the mix, but in the end it all still comes to Supply and Demand. It basically depends on one person making one bet and some else another. For every winner there is a looser. Each is making a statement about their perception of how much demand is there for their bet.

So watch what happened. Demand was growing rapidly for petroleum products and at the same time the oil producers were holding the supply constant. Sure enough the price began to rise. Then along came the speculators and their bets. The prices rocketed up.

With the higher prices the natural effect is that demand will do down. We did see a large reduction in the demand for gas. So now the prices begin to go down. All the betters are faced with a Supply and Demand problem. The demand for their high priced bet is not there and the whole house of cards collapses.

Of course there are plenty of players that attempt to manipulate either supply or demand. There are plenty of stories about tankers full of oil delayed until after key dates have passed. The government also seems to want to get into the game, more on that in a later article.