Here is Nick talking supply and demand and income.
Can we induce more supply by raising price? We are dealing with the Money Illusion again.
Oil has been tied tightly to the dollar deflator for some time, there is no flexibility between oil prices and the dollar deflator, none that can be observed casually. The reason is simple, we have been supply limited since 2001 and the oil trader always covers near term inflation in his selling price.
Is national income at a maximum with respect to oil supplies? Well we have been unable to induce demanders to pay more than $90 for some time, they refused in early 2010, and they refuse today. We are fairly close to equilibrium.
The economy has contracted in the face of oil supply shortages, the economy will expand when energy efficiency increases. Oil suppliers are quite aware of the Keynesian thingy and they don't mind at all if we try it, but they will adjust prices upward when we do.
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