So, who you wanna blame next?

We have met the enemy and he is us! People are starting to see this, but it is going to take a while for the majority to get on board. Meanwhile, the blame game is the most popular show in town. When oil prices spiked, Bush was among the first to take the hit. He splashed around a bit and rose to the top, so big oil was targeted. We finally realized petrol company profits were not as obscene as originally thought, so we started assaulting the oil-producing countries and the cartels.

Then the Chinese looked like they were ripe for a little American ire, so they got to defend themselves. Following that it seemed one of the biggest sources of our troubles is the U.S. Congress.

The real issue, however, is demand and supply. And we Americans have a lot to do with both. It is our practices relative to these two economic variables that, more than anything else, are causing the rapid oil price rise. At a given point in time, if you plot the demand curve for oil on a graph – price on the vertical axis vs. quantity demanded on the horizontal axis – you get a fairly steep curve (negative slope) showing quantity of oil demanded declining rather little in response to relatively large price increases.

If you plot the supply function for oil on the same graph – price on the vertical vs. quantity supplied on the horizontal – you get another steep curve (positive slope) showing quantity of oil supplied increasing rather little in response to relatively large price increases. Both are relatively steep (price inelastic) functions, meaning that demand and supply are both relatively unresponsive to price change (price is the independent variable on the vertical axis). Where they intersect is the market price for oil at that point in time.

Why is demand, or the d-function, steep? Because American consumers regard oil as an essential commodity and there are no quality substitutes. Americans are addicted – they need a certain amount of oil and they do not let price dictate how much they will buy. It’s like with your heart medicine – high price or low, you will get the medicine you need. This thinking and behavior translate into a high-incline demand curve where price can vary over a wide range and not markedly affect how much is purchased (the volume demanded).

Why is the supply, or s-function, steep? On the supply side we experience an inelastic curve because the few major suppliers in the world have a developed capacity. Capacity is fixed. Oil production costs are basically fixed. Higher prices are not necessary to cover the typical escalating variable costs associated with retrieving a scarce resource.

Companies can sell high or low, making money either way. They have a certain amount of petrol to “serve up” whether price is high, low or in between. A rising price doesn’t encourage much more output because there isn’t much more output to generate.

Thus when it comes to oil, the demand-supply scissors are close together. This fact is profoundly behind the dramatic price escalation we have recently witnessed and will likely continue to see for some time to come, though it will occur in fits and starts. With the scissors pretty much closed, any lateral movement of the demand or supply curve will cause a dramatic change in the point of function intersection, or the market price.

Market price is very sensitive to fluctuations in the position of either the demand or supply function. If the rates of incline of the demand and-or supply functions were considerably less, oil price changes in a given span of time would be considerably less too.

Coupled with the inelastic d- and s-functions is a rapidly right-shifting d-function “ramming” a stationary s-function. Americans are using more and more oil at a rapid rate of increase. We want more and more oil at any price level. We are driving more miles each year; we are driving less fuel-efficient autos; we are fueling bigger homes; we are buying more toys that require gas, insisting on more electricity generated with petrol, and buying more petrol-based products off the supermarket shelf each year. Each of us is doing this while, simultaneously, the fuel-using population is fast expanding. Such behavior moves the d-function rapidly to the right – pushing the function farther out on the quantity demanded/supplied axis.

While the d-function is going right, the s-function is “stuck.” And one of the biggest reasons for a “sticky” s-function is us. We do not support expansion of oil exploration or drilling; we reject building more refineries (right now this is where the main bottleneck exists); we do not support nuclear or hydro power as substitutes for oil-fired electric power generation; we block expansion of petrol distribution and storage systems, and so on. It is us who prevent suppliers from right-shifting the supply function. Yet such a shift is necessary to compensate for the right-shift in demand and to keep prices stable.

With inelastic functions, a “high flying” d-function and an immobile s-function, something has to give. That something is the market price, which rises dramatically – a considerable percent increase for a relatively moderate spatial translation of the d-function. This is what we are now experiencing – an immobile and inelastic s-curve being hit by an inelastic, rapidly moving “east-bound” d-function. The impact causes considerable price ascent. No mystery here!

The answer to the question of who deserves the price-hike blame is clear. It is we who are holding the supply curve hostage while creating an essentially vertical d-curve with high velocity lateral displacement. It is a somewhat unique phenomenon – we the consumers controlling both functions.

Be assured, if we do not change, petrol price increases and, sooner rather than later, accelerating general inflation are certainties.

Dr. Phil Grant is a management innovator, author of 10 books on human performance in the workplace and founder of the Law of Escalating Marginal Sacrifice. A resident of Birch Harbor, his e-mail address is: pgrant@midmaine.com