Price is always determined by supply and demand. There is no exceptions. Over short term, demand shift will have a stronger impact on prices because supply adjustment is slower, especially when there is a shortage. However, over long term, supply will always adjust to demand. Marginal cost is the most important factor in determine price over long term. When market price is much higher than marginal cost, there is no question you will see supply comes on line quickly.
I would like to examine the marginal cost on commodities.
First, let's look at copper. The demand shift in copper because of China had a strong impact on copper. The price went up 300% in last 10 years. Currently, the marginal cost for copper is $1.60/lb and the market price is over $3.20/lb. There will be oversupply in copper very soon, if not already exists.
I will look at marginal cost on oil tomorrow.
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