The price of oil

Basic economics says that increased prices reduce demand, and decreased prices increase demand. When things are normal, increasing the price decreases total sales. Not just unit sales, total dollar sales, because demand falls by so much that the increased price does not produce increased (or even steady) sales in dollars (or whatever currency one uses to measure).

Oil is different. A person buys a home in the suburbs with no public transportation, and buys a car to get to work. If the price goes up, it's not possible to stop driving to work, or to sell the house and the car and move to a flat on a bus route. So one muddles through.

And if the price falls, one cannot immediately buy a house in the suburbs and a gas-guzzling SUV.

But, with lower prices, people buy bigger cars and more move to the suburbs and buy cars, so eventually, demand rises, just not right away.

Also, with lower prices, supply is supposed to fall. But, with oil, the cost is in finding the oil and drilling the wells. Once drilled, it costs little to pump, and not pumping causes the well to collapse, losing all the money already spent drilling it. So supply does not drop right away, but there is less exploration and less drilling, so eventually, lower prices will mean less supply and more demand, just not for a year or more.

So, for now, some are predicting a world price of $20 a barrel. Or $15. Or $10. On Friday, oil broke through the support at $30, and looks like it's heading down. If the UN says Iran is in full compliance, it can sell a lot more oil. So lower prices for now.

So more houses in the suburbs, more SUVs, less exploration, and less drilling. But all this will take years before it has any effect on the price of oil.

But when those houses get built and those SUVs get bought and the existing wells get depleted, which will take years, it will mean $100 a barrel. Or $200. Or more.