And you might be right if the problem was elasticity. The problem, however, is not elasticity. The problem is volatility. The market in oil is not so stable as you make out. Because the average cost of gasoline is going to be $4/gallon if isn't already. And possibly $5/gallon in the next 12 months. As I said before, higher prices might not immediately result in reduced demand, but it will in the long term. People will be less likely to take frequent trips to the store, will reconsider long commutes when they move, will do little things to cut back on how much gasoline they use. And those little things will add up. People will use less gasoline. The long term interest of the oil companies is to find ways to at least plateau if not reduce the cost of gasoline. But as I said before, if building a refinery elsewhere and importing the gasoline is cheaper, then that is what will happen. It is increasingly what does happen.
It is a volatile market, but that doesn't change the fact that oil is an inelastic commodity. You're missing a few key points.
1. Individual consumer consumption of gasoline is not the only use of oil. It has industrial use as well, oil-fired power plants for example. Consider all the products made from petroleum or using petroleum as a part of the manufacturing process. Oil is used in the extraction of other energy sources. In fact, and you'll love this, it takes quite a bit of oil to extract
oil from the tar sands.
2. The long-term interest for oil companies is to absolutely
not tap out all of the current oil supply which is finite. But we run into the same problem Prince, and I think you agree. The largest oil field in the world is in Saudi Arabia and was discovered by the British in the 1940's. We are increasingly finding smaller oil fields, in more difficult extraction locations, and of poorer quality.
If the price of oil is not very high then there is absolutely no financial incentive to tap that oil.
A brilliant economist once said that in the long-run we're all dead. In the case of oil, he was spot-on. I'm not saying it is business in a degrading tone, just indifferent. Unless you and I are willing to pay premium money for oil, their is absolutely no incentive to drill in the ANWR or invest in very expensive new refineries. If and when we reach that point, you'll see it happen.
3. Increasing supply does not necessarily reduce demand.
I agree there, completely. Energy independence is not only impossible, it is undesirable. But it makes a good talking point for self-aggrandizing pundits and politicians.
Thank God, someone else understands!
By the way, there are two really good articles on oil in this month's
National Geographic. One on how well Western Siberia is doing as well as how Moscow has centralised the oil production. Plus, one on oil supply. Great reads, both of them.