The Wall St. Journal has an interesting piece on how supply and demand work in the current marketplace to affect prices. It’s a useful refresher course that takes the issue beyond ECON-101 and worth reading. It also points out how Saudi Arabia is behaving as a rational actor in today’s oil economy.

We Can Lower Oil Prices Now
MARTIN FELDSTEIN

lthough most experts agree that financial speculation was not responsible for the surge in the global prices of food and energy, many people remain puzzled about the source of these remarkable price rises. Economics offers a simple supply-and-demand explanation and reason for optimism about the future of commodity prices. In the case of oil, economics also suggests how policy changes today that affect the future could quickly lower the current price of oil.

We all know that rising incomes in China, India and the Gulf states have increased the demand for oil and many other commodities. But how could the modest, one-year rise of these demands lead to 100% increases in the prices of oil and other commodities? Let’s take a look first at perishable agricultural commodities.
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