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I am going through the microeconomics course of the MRUniversity and in the end of the chapter on supply and demand there is a question that I don't get. Here is the question:

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today?

a. The supply of oil will rise today
b. The supply of oil will fall today
c. There will be no change in the supply of oil

Now my analysis is that this means there would be more competition between the oil suppliers in the future and as a result some oil suppliers may decide to leave the market sooner and as a result the supply of oil will decrease. But according to the site the correct answer is that the supply of oil will rise. What is wrong with my analysis?

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  • $\begingroup$ But if some suppliers decide to leave the market sooner, what do they do with the oil they have in the ground? Why not instead to get rid of it as soon as possible, before the price fall? $\endgroup$ – luchonacho Jul 27 '17 at 18:53
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A key distinction is whether the good is storable.

Example 1: Milk (non-storable)

Q: Imagine that there is new technology being developed that will increase the supply of milk ten years from now. What will happen to the supply of milk today?

A: Nothing. Each supply and demand curve is specific to the time period.

Example 2: Oil (storable)

Let's assume oil producers currently have access to oil reserves that they are voluntarily leaving in the ground. That is, firms are effectively storing oil (by leaving it in the ground).

In such a case, increasing the supply of oil in the future is similar to increasing the supply of oil today. You can draw from future supply by storing less today.

Some intuition:

Imagine you have 10 cookies and were planning on eating 5 today and storing 5 to eat tomorrow.

Q: What happens to your cookie supply today if I tell you that I'll give you another 4 cookies tomorrow? Will eat 5 cookies today and 9 tomorrow?

A: No. You'll store fewer cookies for tomorrow.

If you're storing a good for the future, an increase in future supply will increase supply today.

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