Skip to comments.The Oil Price Enigma
Posted on 05/09/2013 1:26:56 AM PDT by neverdem
Oil is the single most important commodity purchased today, and its price influences the fortunes of every nation on the planet in significant ways. Yet nobody can tell you with honesty that they know where the price is headed.
Thirty years ago (and much younger then), I imagined that I could construct a model to calculate the future price of oil -- and even persuaded some others to accept this idea. Needless to say, the price never really performed as my model had predicted, except in very general terms; it did go higher. The experience left me with a deep appreciation of the importance of assumptions in models -- in this case, extraneous political parameters Usefully also, I acquired a certain skepticism towards models generally.
The situation then was relatively simple: There was just an OPEC monopolist and the 'rest-of-the-world' producers. Today, the situation is much more complicated and I'm not sure I know how to predict a future price for crude oil.
In 1982, the world price was controlled by an OPEC core, mainly Saudi Arabia, which had excess production capacity and could also afford to cut their production in order to maintain a price. In fact, in the early 1980's, Saudi Arabia cut its production from 10 million barrels per day (MBD) down to almost 2 MBD in order to sustain a high world price. Ultimately, they failed -- probably because they needed the revenue (i.e., total number of barrels sold times the world price). The other world producers, including the rest of OPEC, were simply "price-takers," selling as much as they could produce at whatever the world price happened to be.
Under those circumstances, the scenario was fairly simple. One assumed that the OPEC core acted rationally, which means they would try to maximize their...
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Fracking. Oil/tar sands. Offshore.
There’s more world production today.
Electric cars. Natural gas cars. Power plants running on natural gas. Biodiesel. Coal Oil. Europe in crisis. Japan shrinking.
There’s simply less demand for oil.
More supply and less demand. Now tell me again what that does to the Price?!
Something like 10,000 times more methyl hydrate than all the oil and coal put together.
Just that getting it is the hard part...
The author appears not to be intentionally talking about Global Warming, but his point applies there too. Those who understand mathematical modeling and statistics often have a healthy skepticism of the AGW models. Temperatures never really perform as CO2-driven climate models predict. This results from the importance of assumptions in models -- in this case, extraneous arbitrary parameters.
As for oil prices, it's a tough question and an important one economically. His point though is that they are hard to predict in advance, and he is correct.
Demand will increase in BRIC countries.
BINGO! Give the man a cigar!
It was Britian’s Nort Sea Oil that broke the OPEC monopoly on price fixing.
The Soviet enterprises always operated at an increasing actual loss and they had no way of knowing that. The more our own business operations are dependent on government rules and direction the closer we approach that model.
It will happen. If the price of oil is artificially jacked up again by crisis in the ME or the Greenies getting a stranglehold on US production it will be come economically feasible to get the ice balls up. Once they have the tech to do that and start the price of production will decline fairly quickly, at least relative to a stable dollar or the price of gold. Thus it is in Arabian interests to NOT allow the price of oil to go up high enough to allow that to happen. Unfortunately for them they have a declining influence on oil price and the oil companies and nations are going after the icy nuggets ahead of the market because of OPEC manipulation.
The caveat is that the techniques are more expensive than conventional vertical well drilling was. The lowest hanging fruit has been picked.
I make financial models for a living. It’s 1000% about the assumptions. Period. That’s what a model is!
I have done significant modeling as well, particularly for politicians, and that is a point few understand. The model tells you only what will happen according to the model. If the model does not match real life to a reasonable degree, then the model tells you relatively little about the real world.
There is potential for less demand for oil. But as of today, at 89.3 million barrels per day, the world is consuming more oil than ever before.
Exactly. I tell the guys who work for me to list your assumptions and we can argue/discuss/tweak them. the key is to try and narrow the margin of error in your assumptions. And if you build assumptions based on assumptions (forecasts based on forecasts) your risk for error is higher. In my first job my CEO told me one day that the one thing he knew for sure is that I would miss my forecast. He just wanted me to try and minimize the amount by which I missed it.
I’ll second that. Pollster1 hit it square on, but I’ll take it a step further.
Singer’s target is central planning/planners. Complex, dynamic systems can’t be managed because they cannot be predicted. There are too many variables.
The only system that can manage is a free market and I don’t mean the pretend ones, misleadingly named.
In the long term, the price will rise.
Even with new sources, the world demand is going to increase. The major factor however is devaluation. As the currencies are devalued, the price over the long term will rise.
Currency devaluation will continue until the debt is devalued.
Good CEO! A man who can communicate his understanding and expectations concisely is a rare find.