The Price Of Oil

60 minutes ^ | January 11, 2009

[sbark]

H.Reid and even a GOP Sen from Wyo. is doing everything they can to reverse it

http://townhall.com/columnists/AmandaCarpenter/2009/01/10/harry_rei...

[DE88]

I would have to see the statement to make a further comment. Although I know for sure demand has not dropped 47%. You can look at nymex and see the totals daily.

[CharacterCounts]

No, you're right! CBS is an objective reporter of fact.

You don't have to rely on CBS. Anyone can Google oil supply and demand and find the figures reported in hundreds if not thousands of places on the internet. The correct figure is around 4.7%.

[aruanan]

Oil per barrel is under 40 bucks, and gas is still over 2 bucks for middle and premium gas?

Well, there's only about 19 gallons of gasoline in a 42 gallon barrel of oil. So there's about $1/gallon of the cost right there, add refining costs, transport, delivery in the gas station, etc., a little over $2/gallon is still pretty cheap--it's cheaper in constant dollars than it was between 1979 and 1984.

[hedgetrimmer]

Where do you teach?

[okie01]

So you believe as I that deliveries have dropped, and therefore price. You car eto quibble about units of measure. Demand drops, price drops.

I don't quite understand why you're choosing to argue with me when I asked a question designed to clarify your point.

At any rate, there is no question that a.) demand has dropped (by, maybe, 5%) while b.) the price has cratered (to about 1/3 of what it was). That's not in dispute. Nor would that relationship between demand and price be unexpected.

But the relationship between demand and price isn't linear. For example, if the market is in equilibrium -- supply is 1 million barrels and demand is 1 million barrels -- the cost of barrel #1,000,001 is several magnitudes higher than the cost of barrel #999,999,999. And the cost of barrel #995,000,000 will be a great deal less.

[Smokin' Joe]

It is the difference between multiple buyers bidding on a small surplus capacity in order to make sure they can keep the refineries going and bidding on a few million BOPD more surplus capacity. When supplies are tight, price is up, a proportionally small increase in surplus capacity often means much lower prices.

Consider, if food were auctioned (which it is, really), what the prices would be if there was clearly enough to go around versus a supply which may or may not be enough.

The latter situation means prices would go higher as people assured themselves they had enough. Add in geopolitical uncertainties, and uncertain supplies, and situations when the marginal capacity (the amount of 'extra' oil out there) is low will lead to much higher prices.

[Smokin' Joe]

Don’t forget that the use of MTBE as an oxygenating additive was dropped, and ethanol mandated by Federal Law while the price was climbing back when. That alone added to the cost of producing a gallon of gas. When the liability waiver for MTBE was not renewed by Congress, gas prices jumped about 40 cents/gallon in a very short time (at least in my area).

[DE88]

I would certainly agree with that.

[Western Phil]

“Government policies encouraged and enabled the speculative bubble.”

I suspect that the high for oil occurring simultaneously with Bush's cancellation of the presidential ban on off shore drilling was not a coincidence. Nobody wanted to hold high futures in a market moving down.

[okie01]

Government policies encouraged and enabled the speculative bubble.

When did the price of oil start climbing toward its peak?

I believe it was when we elected a Democrat Congress. A Congress that made it quite clear that the largest consumer of oil in the world (the USA) would do absolutely nothing to increase its production or its reserves.

Gee, I wonder why the price started climbing...???

When did the price of oil peak, then start to drop?

I believe it was about when Bush rescinded the Executive Order against offshore drilling and the GOP minority in Congress held a "sit-in" to support legislation enabling offshore drilling and opening up ANWR.

Gee, I wonder why the price of oil started declining...???

Liberals do not understand markets. Which is why they try to control them...

[seatrout]

—You ought to try life without speculators sometime. Just go to a muslim country—

Please explain.

[the invisib1e hand]

Please explain.

Oh pleeeeeeease! Tell me you don't mean it.

speculators do the heavy lifting of price discovery and provision of liquidity. Without them, one or the other parties to a market transaction would be able to dominate prices at various times.

No speculators, no free market.

[seatrout]

—Without them, one or the other parties to a market transaction would be able to dominate prices at various times.—

But isn’t that how the law of supply and demand works? And there is no need to be patronizing; not all of us have lived in Muslim countries, after all.

[TC Rider]

And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.

This can't be right. Bush wasn't even president then.

[seatrout]

—Although I know for sure demand has not dropped 47%.—

Of course not. I doubt it dropped even 10 percent since the July high price ($147/bbl IRRC) hit. It would take something on the order of a nuclear war devastating both the USA and China to drop world oil demand by almost 50 percent.

[ODC-GIRL]

Count your blessings. In Michigan, on 1 JAN, our taxes on gas went up. We’re at $1.90 or so and looks like it’ll stay that way awhile.

[scepticalbanker]

As I posted on several other oil threads nearly two years ago, when oil demand approaches around 98% of production capacity oil prices start to rise hyperbolically due to the relative inelastic demand/supply curve. This was seen in the late 1970’s when crude prices went from a few dollars a barrel to around $30 (this occured with almost no oil trading or supposed speculation) followed by the collapse in oil prices in the 1980’s to around $10 to $15 a barrel when the demand/supply ratio dropped to around 95%. As I discussed in these posts two years ago, all you needed to do to drop oil prices rapidly was to reduce the demand/supply ratio by about 3% or about 2.5 MMBOPD.

This is why when the Democrats talk about the fact that we might only get 1 million barrels a day from ANWR and that this is only 1.2% of world supply so it will have little or no effect on price is bogus. Oil prices are greatly affected by small changes in the demand/supply ratio when that ratio approaches around 98%. In addition if you were to add oil production from offshore the U.S. now currently off limits you might increase world production by up to 2 million barrels a day or 2.5%.

The floor for oil prices is typically set by two things, usually the cost to develop and operate a field to produce a barrel of oil at the last marginal barrel of demand (I would estimate this to be around $50 to $70 per barrel at current demand rates), though it can sometimes drop to the cost of producing (operating costs only) the last barrel of demand (I would estimate this cost at between $20 and $25 per barrel). If oil should drop to the latter floor almost no new production will be brought onstream.

[the invisib1e hand]

The law of supply and demand is a theory.

Markets are practice. How does the theory get put into practice?

Every participant in a market economy ought to understand what it components are, as well as its premises, its justifications, its moral superiority, its weaknesses, etc.

Ignorance truly does lead to slavery.

I'm not faulting you, only the fact that you've apparently never been taught. I find that unthinkable, in America. And yet, here we are.

[the invisib1e hand]

A very skeptically interesting post.