What’s with the oil price?

June 17, 2010

Crude Oil Price

Crude Oil Price for the past 1 year. (Source: http://www.oil-price.net)

So, I need somebody to explain this to me, because I can’t figure it out. I must be missing something elemental. In basic supply and demand, when the quantity of a product decreases and the demand stays the same, the price of the product increases, correct?

BP’s oil fiasco began on April 20, 2010 and the latest estimate by the government is that the spill is spewing out 60,000 barrels of oil per day. It has now been 60 days since the explosion, which means approximately 3.6 million barrels of oil could have been lost due to this disaster. With an annual import of approximately 4.3 billion barrels of oil a year and domestic production of about 1.9 billion barrels, this 3.6 million barrels is only .05% of total U.S. oil consumption (assuming all that is produced and imported is consumed). The spill hasn’t been stopped yet so this number could go up.

This .05% is a small amount of the total so I would expect either no effect on the price of oil or a maybe a small effect. What confuses me is that in the above graph of the crude oil price over the past year, the price dropped significantly around the time of the crisis. Why would the price drop? Shouldn’t the price at least increase because of a loss in supply? What am I missing?

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