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| 11/22 |
| 2008/3/7-9 [Science/Disaster, Science/GlobalWarming] UID:49375 Activity:high |
3/7 So what's the truth about oil prices? I'm sure supply is about
where it was 5 years ago and I cannot imagine demand is that much
higher and yet prices are almost triple. Is this a speculative
bubble where investors are buying oil because they perceive the
price of oil to be rising, is this manipulated by OPEC, or have
costs of doing business risen dramatically?
\_ What about it? People are already working on a solution.
The free market will solve the problem. -dimwit #1 fan
\_ The problem is that it's not a free market for oil.
\_ http://www.wtrg.com/prices.htm
More info than you can possibly want to know.
Not directly addressed on that page is the fact that oil supply
is not entirely fungible; as production in individual countries
starts to fall, those countries tend to stop exporting oil before
their supply totally crashes. That shifts more of the demand to
countries with riskier supplies like Iraq and Iran. It also
reduces the excess capacity available on the market, which makes
the market more susceptible to shocks.
And demand is rising, of course. -tom
\_ Not really that much info there. Most of it was historical.
However, the article does allude to a $50/barrel "risk
premium". Is that really justified? To me that's another way
to say 'gouge' and that oil should realistically be about
$40-50 barrel based on supply and demand alone.
\_ Who is gouging whom? Crude oil is a relatively free market.
Why do you think it should be $40-$50 a barrel? -tom
\_ I am saying that based on supply and demand that is
where it should be. That's from your own article! So
there is a $50 "risk premium". That seems hard to
justify. I also can't believe you think oil is a
'relatively free market' when there is a cartel involved.
\_ Demand is certainly up and the truth is that oil prices are mostly
inelastic. So demand doesn't go down very much when prices go up.
If you think about this, there are pretty dire consequences for
the world economy, since the only other way to slow down oil
consumption is to have a recession. I can dig up some Economist
articles about this if you want, but you should try Googling
yourself first. -ausman
\_ I don't think these prices are driven by demand. Demand has
not tripled. The curve is steep and there's no real reason
for it. It's not unprecedented, but it's peculiar. I mean,
if demand is that inelastic then why not charge $200 or $400
per barrel? (Or why not charge $100 sooner when $35 was just
fine not long ago?) A 'risk premium' to me means that
someone is hoarding supply 'just in case they can't get any
later'. I know the US was doing this with the strategic oil
reserve. Is the US government the culprit and soaking up the
supply at these prices? Most businesses tend to buy what
they need and not keep massive inventories of oil. My
opinion is that much of this rise is speculative just like
the price of tulips or Miami condos. I am just wondering who
the greater fool is here. "Oil prices will never go down.
They aren't making more of it."
They aren't making more of it." I noticed in a lot of my
mutual fund portfolios that oil companies and suppliers are big
contributors in terms of % of portfolio. This implies to me
that Wall Street is parking a lot of my money there looking
for the quick buck and I was wondering what happens when
(not if) oil prices finally go down. Look at this graph:
http://i129.photobucket.com/albums/p237/1ace11/200705fig1.jpg
Pay attention to the "real" parts and not the forecast. As
you can see both supply and demand have been near a plateau
since maybe 2004 and yet price has risen.
\_ I look at the same graph and I see that production exceeded
consumption for most of 2004-2006, then production started
to fall, but consumption did not. In fact consumption went
up. So prices going up is what a relatively inelestic demand
curve would predict. Why didn't they raise prices sooner?
Because there was someone there willing to undercut them if
they did. Why isn't demand going down to match supply right
now? Because the people consuming most of the oil (American
drivers and manufacturers worldwide) are willing to pay
more to get the oil they want. This stand off has to resolve
itself somehow, I agree, but I am suggesting that it only
can do so by a demand shock not a supply increase, hence a
global recession, at least until we can get our economy
less hooked on cheap oil. The other alternative explaination
is that we are just suffering for an underinvestment in
oil exploration back when oil was really cheap, like in
oil exploration back from when oil was really cheap, like in
the late 90s. If that really is true, then production should
ramp back up again RSN.
\_ speculation, dollar weakness, venezualen hijinx
\_ Dollar weakness is something I forgot about, but a very good
point.
\_ Yes, perhaps these speculators are just looking for an
inflation hedge. |
| 11/22 |
|
| www.wtrg.com/prices.htm Energy Economist Newsletter Oil Price History and Analysis A discussion of crude oil prices, the relationship between prices and rig count and the outlook for the future of the petroleum industry. Introduction Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. The US petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s. Crude Oil Prices 1947-2007 Click on graph for larger view *World Price - The only very long term price series that exists is the US average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the US imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and US prices we created a world oil price series that was consistent with the US wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude. The Very Long Term View The very long term view is much the same. The very long term data and the post World War II data suggest a "normal" price far below the current price. Crude Oil Prices 1867-2007 Click on graph for larger view The results are dramatically different if only post-1970 data are used. If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in US oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar. OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil. Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production. If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline. OPEC Production and Crude Oil Prices 1973-Present Click on graph for larger view Crises in Iran and Iraq Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 25 million barrels per day of oil production between November, 1978 and June, 1979. While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day. Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 65 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979. The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from from $14 in 1978 to $35 per barrel in 1981. Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran. Iraq's production remains about 15 million barrels below its peak before the Iraq-Iran War. Middle East, OPEC and Crude Oil Prices 1947-1973 Click on graph for larger view US Oil Price Controls - Bad Policy? The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that US consumers of crude oil paid about 50 percent more for imports than domestic production and US producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the Us consumer. In the short term, the recession induced by the 1973-1974 crude oil price rise was less because US consumers faced lower prices than the rest of the world. In the absence of price controls US exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less. US Price Controls 1973-1981 Refiners Aquisition Cost of Crude Oil Click on graph for larger view OPEC's Failure to Control Crude Oil Prices OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. What is the difference between OPEC and the Texas Railroad Commission? The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity. With enough spare... |