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You're asking inconvenient questions. See my Socratic Economics V: Supply and Demand
In that little diagram, the "equilibrium" or crossing point is observed, namely a (price, volume) point. The rest of the diagram is counterfactual. I suspect people are using consumption as a proxy for demand and production as a proxy for supply. The difference between consumption and production is the change in inventory. But ignoring that difference for a minute, consumption is just the demand at the "equilibrium" point. Nobody is counting all the times someone goes and says "gee, I want to buy some more of this but it's too expensive" or "gee, I wanted to buy some more of this but the shelves were empty" and so the demand curve is unobserved (unobservable?). Similarly with the supply curve.

Does one have to look at the order book at a commodities exchange (or the open interests in futures) to get supply and demand curves for oil?

And, of course, if the supply and demand curves are counterfactual it is going to be rather hard to measure their slopes (the "price elasticity" of supply and demand).

Not that I claim that diary or the comments has an answer - all I'm suggesting is that the concepts are nonsense. the IEA is representing production, not a supply curve as a function of time. And they're, of course, assuming a particular level of satisfied demand.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Carrie (migeru at eurotrib dot com) on Thu Nov 11th, 2010 at 10:53:42 AM EST
[ Parent ]
Yes, I see your previous post--and my clever comment! My point, regardless of whether the curves of supply/production or demand/consumption are theoretically  or practically correct, is that there is an assumed price for oil in, say, 2020, that is not exposed in Jerome's chart.

Who cares if there is plenty of oil to be burned if it costs $1000 per barrel? Who cares if I am forced to turn off my furnace and never travel? I'm sure that the millionaires in China will be driving around in their Buicks.

General Motors says it has become the first global automaker to sell 2 million vehicles in China in a single year.But the bigger news is GM is on track to sell more cars in China than in the U.S. this year.

Through October, GM has sold 1.8 million vehicles in the U.S.October sales of Shanghai GM's Buick brand jumped 35.7% on an annual basis to 54,490 units. Demand for both the new LaCrosse sedan, seen in that photo above, and the smaller Excelle, known as the Regal in the U.S., rose more than 40% year on year.

http://content.usatoday.com/communities/driveon/post/2010/11/gm-general-motors-china-buick-lacrosse- regal/1

by asdf on Thu Nov 11th, 2010 at 01:22:40 PM EST
[ Parent ]
in that graph. It relates to the "discovered, but yet to be developed" component. This stuff (most of it) would never be developed if the price were not high enough, because it's too expensive to extract, or was until recently.

That's another significant element of the equation. If oil is $100 a barrel, then it's worthwhile spending $80 to extract the difficult stuff. But it's not a fundamentally very productive endeavour. In fact, it's a matter of pouring more and more resources (skills, machinery, energy etc) into a vanishing resource. Not a very smart strategy.

This is what they mean when they say that the market will provide if the price is right. Though I think that they are materially wrong on that. Canada has the world's second biggest hydrocarbon reserves. But they just can't seem to ramp up production the way the economists predicted. It's just too hard.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Nov 11th, 2010 at 05:31:38 PM EST
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