When demand does not equal supply

OK, boys and girls the term for the day is ceteris paribus. It is Latin for "all else equal."

I teach about supply chains. How raw materials are transformed and end up in your house as a finished good. The supply chain for oil to gas has only a few steps that can boiled down to:

Extraction -> transport -> refining -> transport -> local gas station -> your car

The problem right now is that there is a HUGE overstock at the world's refineries. Tankers are being paid to sit in the ocean because the oil waiting to be refined simply has nowhere to go.

Economics 101 says anytime there is too much supply the price must fall to clear out the market. If say, gas fell to $1/gallon we'd all be so happy we'd drive a lot more and the extra supply would get used up.

The over supply of oil should lead to a drop in oil prices, ceteris paribus. Instead, the price of oil has been on a steady climb. From a low of just under $33/barrel a few months ago to over $60 now.

At the moment all else is not equal. At yesterday's conference 3 other economists spoke (besides Krugman). They disagreed on many details but they were all in agreement on one key prediction: The dollar is going to drop and drop quite a bit before the year is over.

So traders are bidding on oil sitting out there doing nothing rather than keeping their money in dollars. Meanwhile, the dollar is depreciating (meaning everything we buy from the rest of the world costs more) and the price of oil is going up.

Double whammy. I hope this brightens your mood as you head back to work.