The fundamental rule of economics rocks

Bloomberg reports, “Crude oil for January delivery dropped $3.84, or 9.6 percent, to $36.22 a barrel at 2:47 p.m. on the New York Mercantile Exchange, the lowest settlement since June 29, 2004. Futures touched $35.98 during today’s session. Prices have tumbled 75 percent from a record $147.27 on July 11. The January contract expires tomorrow.”

Finally those countless hours spent during my school-going age trying to cram those boring economics theories have paid off. I don’t recollect having seen or heard of a more classic example of the simple albeit very powerful rule of economics.

When demand exceeds supply prices prices sky-rocket and vice versa and that’s exactly what happened since the 3rd quarter of 2005 up until the middle of this year. Gas prices doubled from $2 per gallon to $4. Reason: People were cashing in on the real-estate boom, taking out second mortgages and spending that dough on buying everything they had ever wished for. Direct and Indirect demand for gas was way beyond available supplies.

Then the lightning bolt hit. The financial industry collapsed and brought down everything with it. Markets recorded their highest drops in history and millions lost jobs.  Consumption tanked and here we are. 75% price-drop – 6 months – who would have thought? We are talking about liquid gold, people. No one saw this coming and there is nothing else that can explain the free-fall.

The rule works and I am a believer.