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Let’s draw a supply curve!

My response to the article Fact: Drilling Does Not Reduce Gas Prices

First draw a standard graph using Cartesian coordinates.  The Y axis we will name PRICE and the X axis we will name QUANTITY.  Now let us plot the standard basic supply curve.  It is a positively sloped curve.  The supply curve is positively sloped because as price increases the quantity supplied increases.

Think of it this way; when oil prices are low, those who drill for oil will only drill in places where it is easiest and less expensive to get oil.  However, as the price increases then it becomes more profitable to drill in more difficult and more expensive areas to drill.  So, the price increase correlates positively with increased production.  Look at the supply curve again and you will see it correlates positively with increased prices. 

Have an army of statisticians look at the numbers and you will see increased productivity does not correlate with lower prices; increased productivity correlates with higher prices.  Yes, I ran the numbers myself. 

Now, the article Fact: Drilling Does Not Reduce Gas Prices made what is called a correlational fallacy.  It looked at a standard supply curve and said, “Wow, the supply curve slopes upwardly and there is a positive correlates between price and quantity and not a negative correlation between price and quantity.  So, increased quantity has nothing to do with lower prices”.  Again, this is a correlational fallacy.  One of the most famous correlational fallacies was the one where it was demonstrated repeatedly there is a positive correlation between eating ice-cream and murder.   Sure enough, increased ice-cream consumption correlates positively with increased murder.  This kind of fallacy is one of the reasons Harvey Milk’s murderer was able to use the so called “twinkie defense” (although it is my understanding Dan White didn’t actually eat Twinkies).

The purpose of increased drilling is to shift the supply curve to the right.  Energy is considered price inelastic meaning the slope is so steep when the supply curve makes small shifts to the right there can be a large downward shift in the market equilibrium point. 

So, congratulations, the article Fact: Drilling Does Not Reduce Gas Prices discovered the supply curve is positively sloped rather than negatively sloped and then makes a laughable statement suggesting increasing the supply has nothing to do with price.  I am starting to think the article was an attempt to be misleading rather than wrong.   The part about independent statisticians checked the math is sort-of a clue.  Every statistician (and I know statistics) would say the numbers check out and supply increases do not correlate positively with decreased prices.  This is because the supply curve is positively sloped.  However, increased drilling will shift the supply curve to the right causing a shift in the market equilibrium point.  This is the goal of increased drilling.  The goal of increased drilling is not to somehow undermine the economic understanding of the slope of a supply curve.  In fact, I am sure all mainstream and even most kook-fringe economists will tell you the supply curve has a positive slope.

However, to then suggest, because the supply curve is positively sloped it means increased production has no relationship with the market equilibrium point is infuriatingly silly.  At first I thought the article might merely be silly but on reflection it appears it is intentionally using words and phrases in in such a way to be misleading.

Think of it this way, if increased drilling has nothing to do with lower price then would you suggest shutting down most or all oil wells because it would have no impact on price?  Of course you wouldn’t because you know increased supply results in lower prices ceterus paribus.



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