May 23, 2008
According to the Law of Supply and Demand, as the price of a good rises, demand for the good will fall. Turns out, the law holds true for the price of a "bad."
Goldman Sachs (NYSE: GS ) analyst Arjun Murti recently famously predicted that oil could cost as much as $150 to $200 by the end of this year. His take on the situation: Buy shares of ConocoPhillips (NYSE: COP ) , Halliburton (NYSE: HAL ) , and El Paso (NYSE: EP ) . Predictable.
Also predictable: a report out of the Transportation Department this morning. Shocked by the high gasoline prices that come with pricier oil, U.S. drivers spent 4.3% less time on the road in March, driving 11 billion fewer miles than last year -- the steepest year-over-year decline ever recorded in public records. So it seems the Law of Supply and Demand still works. The price of oil went up, and demand for it went down.
In related news, Ford (NYSE: F ) confessed yesterday that the cost of fuel is depressing demand for its fuel-thirstiest vehicles -- SUVs and large trucks -- and will postpone its promised profits in fiscal 2009. (Similar rumbles have been heard from Ford archrival GM (NYSE: GM ) .)
Many credit the spike in oil prices to surging demand for cars -- and the fuel to run them -- from India and China. But this Fool wonders whether Supply and Demand is a merely local law, or an international one. If the latter, I have to think that the rising cost of oil will force down demand for both cars and gasoline. And not just here, but everywhere.