Quote:
Originally Posted by Maurus  Last I checked when cost increases demand decreases while supply increases. Just because people invest their money in a market doesn't mean more people need the same commodity. If you invest in oil, you will invest in the oil companies, not buy barrels of crude oil like if you were to invest in gold.
The unfortunate thing is that with these rising prices in oil, people still go to the gas pump because of the car being more of a necessity these days than a luxury. |
In the short term, if demand decreases supply does increase, until the surplus is absorbed. However, the company decreases production to the new maximum revenue point and this decrease supply to meet the decrease in demand at the higher price point.
People invest in oil futures as a hedge against inflation. Every time the fed cuts rates the chance of inflation rises. As the chance for inflation rises the demand for oil futures increases and this increases the price of a barrel of oil. Since oil is so high already it is essentially a self fulfilling prophecy. Oil companies margins decrease as the costs of the raw material increases. If it was a slight increase they might just ride it out and not pass it on, but a large increase requires a rising in the price of the goods sent to market, refined fuel. Since fuel is almost a need it sparks an increase in prices across numerous industries.
The only way to stop this is to raise rates or at least stop cutting them. When the fear of inflation abates, the demand for oil futures will diminish and the price will drop. This will cause a decrease in the price at the pump in the hopes of attracting more customers. Customers will pay a lower overall percent of income and thus have more expendable cash on hand to buy other goods. Demand will increase across industries and we will start to grow as an economy again.