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Why oil prices are high, and will stay there
Posted by: McQ on Monday, May 01, 2006

For those that think the oil prices we're now experiencing are a temporary blip, Robert Samuelson is here to disabuse you of that idea:
Oil was cheap in the 1990s. From 1993 to 1999, crude prices averaged about $17 a barrel. Low prices discouraged exploration; they encouraged consumption. China emerged as a big user. In 1995, global demand was about 70 million barrels daily (mbd); now it's almost 84 mbd. Spare production capacity slowly vanished, meaning that now any supply interruption—or rumor of interruption—sends prices up sharply. An Iraqi pipeline is attacked; prices jump. Nigerian rebels menace oilfields; prices jump.
China. India. Full production capacity.

As I understand it, only Saudi Arabia has some production capacity remaining.

So how is that transmitted so quickly to the pump? Survival requires it:
These pressures get transmitted quickly to the pump, because there are few fixed-price contracts in the oil business. At each stage of distribution—from producers to refiners, from refiners to retailers—prices are adjusted quickly. They're often tied to prices on major commodities exchanges, where oil and other raw materials are traded. "A gas station will get a delivery every four to eight days [at a different price]," says Mary Novak of Global Insight. Even between deliveries, station owners may push prices up because they know that "for my next tankload, I'll have to pay the market price."
What they have now must stake them to the next load which will reflect increased pricing brought on by interruptions in supply (and rumors of interruptions). Supply is so tight - because we are at max capacity - that any hint of trouble or problems in production will cause pricing to rise in the futures markets and thus at the pump. That's why what happens in Nigeria's delta impacts your wallet.

Read the whole article. Samuelson talks about profits as well as explaining why, to this point, higher oil prices haven't effected the growth of the economy (and, depending on how high they go, may not).

But the main point to take away from all of this is this is the present pricing is here to stay and may go higher ... much higher. All the whining, crying, complaining and $100 checks in the world aren't going to change that.
 
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All the more reason to look forward to oil fields in the Arctic. Even when the ice melts enough for some serious increase in the supply of oil to the markets, it will still be too cold for the Nigerian rebels or Iraqi insurgents to make the trip for a pipeline attack. Price stability!
 
Written By: Wulf
URL: http://www.atlasblogged.com
For a view rather less pessimistic than Samuelson’s, see my friend Ronald Bailey’s Peak Oil Panic.
 
Written By: D.A. Ridgely
URL: http://
No no no no. What is this crap you’re peddling here? Production capacity? What the hell is that?? "Supply and demand"- never heard of it.

Oil prices are the result of big oil collusion and price gouging! A few evil texans wearing black stetsons who probbaly have a stash of illegal servants they won’t let go to the May Day protests today meet in a secret bunker somewhere and decide how much they can jack up the prices. And they take their cue from BushCo. who is driving the up tensions with Iran to raise the prices.

Or so those on the left and in fantasyland would have you believe...
 
Written By: shark
URL: http://
All the more reason for smart-thinking folks to diversify their choices of energy, and begin conserving - voluntarily.

Folks caught in the renting cycle can’t do much to help themselves here. They are galley-slaves to the grid. But price-conscious real-estate owners should begin to modify their homes to accept diverse energy inputs. I chose to end my dependance on whimsical urban grids by installing an LP stand-by generator, a modest photo-voltaic array and a supplemental wind-generator.

As for conservation, telecommuting offers the wired world an opportunity to eliminate the energy-costs of transportation while still allowing free people to associate as offices, companies and associations. Much of our nation’s commerce could be conducted via broadband. Let’s see how much.

I’d like our nation to revolutionize its energetics in the next century. The technology is already here, and free people making informed buying choices will lead the way.
-Steve
This comment was photosynthesized.
 
Written By: Steve
URL: http://
The one point that seems missing from the reporting ..

If this is a global issue, are the Europeans, who already have inflated gas prices due to huge taxation, also having increased prices ? How about the prices in Japan, China and India.

The parochial reporting on these gas prices seem geared at making it appear a US problem, but is it ?

Till this becomes clear, all the talk by oil industry types and politicians is merely "ear candy."
 
Written By: Neo
URL: http://
As you say
Saudi Arabia has excess capasity
From 1992 to 1996 world demand rose from 60 to 70 mbd with no major change in price. The Saudis just increased production to meet demand AND to keep the US Army between their oil fields and Sadam.

Now they have stopped accommodating the increase in demand. As the biggest supplier in the market they control the price. They don’t need us anymore. They do what "prophet maximizing" theocracies do. They raise prices.
 
Written By: cindyb
URL: http://

No, Neo...
it isn’t a US problem. It’s a global market. That $70 per barrel of oil that we keep hearing about really is GLOBAL. Yes,
even in India,
they’re paying more at the pumps.

So, now that that’s clear, how about that ear candy?
 
Written By: Wulf
URL: http://www.atlasblogged.com
Now they have stopped accommodating the increase in demand.
Actually they haven’t. But refining is also at capacity. You can pump all day long, but if it can’t be refined, it does no one any good. Without commensurate refining capacity, at some point, production capacity is pegged whether you can pump more or not.
 
Written By: McQ
URL: http://www.qando.net/blog
As I understand it, only Saudi Arabia has some production capacity remaining.
Supply is so tight - because we are at max capacity - that any hint of trouble or problems in production will cause pricing to rise in the futures
markets and thus at the pump.
From the WaPo - 4/28/06:
DUBAI, United Arab Emirates — With oil prices above $70 a barrel fouling the world economy, dismay is focusing on Iraq, whose exports have slipped to their lowest levels since the 2003 invasion.

"Iraq could be making a tremendous difference," said Dalton Garis, an economist at the Petroleum Institute in Abu Dhabi. Instead, its shortfall is "a significant contributing factor to the high price of oil," he said.

Iraq, a founding member of OPEC, sits atop the world’s third-highest proven reserves. Its estimated 115 billion barrels is more than any other OPEC member except for Saudi Arabia and Iran.

But contrary to optimistic expectations, Iraq’s oil production has slipped further and further since the U.S.-led invasion, to an average of 2 million barrels a day. It has never regained even the reduced production levels that prevailed in the 1990s, when Iraq was under tough U.N. sanctions.

Iraq’s oil could be providing relief to world markets, strained by high demand from China, the nuclear-related showdown with Iran and unrest near Nigeria’s oil fields. Instead, it’s not even covering its own needs.

....

Instead, repercussions from the U.S.-led invasion are now slowing the global economy, said Saadallah al-Fathi, a former OPEC official who advised Iraq’s oil ministry under Saddam Hussein.

"The invasion of Iraq hasn’t only been devastating to the Iraqi people, but it has been detrimental to the rest of the world," al-Fathi said from his home in Sharjah, in the UAE. "Iraq has lost a third of its production due to the American invasion."

"Now that Iraq has to import many petroleum products, it’s a double whammy," he said.
Just another benefit of the our folly in Iraq. Mission Accomplished!


 
Written By: mkultra
URL: http://
McQ you know better than that ...

If they were pumping more oil than could be refined, the price of the marginal barrel of oil would be headed towards 0 rather than $100. The laws of supply and demand work for oil too. If they can’t refine it, its not worth much. The cost per barrell is a cost of the input and not the output of the refinery. The cost of a barrell of oil is up what, 300% since 2002? If we can only refine 70mbd then the price of a 70mdb be steady. The price at the pump would vary but not the cost of the raw product.



 
Written By: cindyb
URL: http://
cindyb, our refineries are at capacity. I don’t think that China has an adversion to building more refineries for its own use.
 
Written By: Mark A. Flacy
URL: http://
Just another benefit of the our folly in Iraq. Mission Accomplished!
MK, you’re saying that we didn’t invade because of the oil? I’m shocked.
 
Written By: Mark A. Flacy
URL: http://
MK, you’re saying that we didn’t invade because of the oil? I’m shocked.
Didn’t recall saying that.

But if we did, was it Bush’s intent to make more oil available - or less?

Anyway, it is simply fascinating to watch those on the right - such as McQ - completely ignore the impact that declining production in Iraq has on the world’s oil supply, and the price of oil. Samuelson does the same thing. They talk about demand. But they don’t talk about supply. Of course, I wouldn’t expect them to do anything else. But it is still fascinating.

 
Written By: mkultra
URL: http://
shark:>"Oil prices are the result of big oil collusion and price gouging!"

I wouldn’t have expected a liberal-baiting wing-nut to be so perceptive.

Collusion in price gouging isn’t the whole picture, but it’s happening. It’s really happening.

"But it can’t happen here! America is a free-market country!"

Classic market theories require a large number of sellers and a large number of buyers operating independently whose only concern is commodity price.

Our 3 big oil conglomerates ( "Our?" "what you mean ’ours’, Kimosabee? " ) produce crude oil as well as refine and distribute it. They benefit from high crude prices even if their refining margins are consistant, ( which hasn’t been shown to be the case either. )




 
Written By: Joey Giraud
URL: http://
Anyway, it is simply fascinating to watch those on the right - such as McQ - completely ignore the impact that declining production in Iraq has on the world’s oil supply, and the price of oil.
What, did you graduate from Clara’s Whorehouse, Chili Parlor and Law School or something? I mean, I have to conclude you were taught to read in a (cough, cough) non-traditonal atmosphere because you seem incapable of understanding simple english:
What they have now must stake them to the next load which will reflect increased pricing brought on by interruptions in supply (and rumors of interruptions).
Would you consider "the impact of declining production in Iraq" as an "interruption in supply?"

Or is the "Iraq" you’re speaking of on the same planet where you usually reside and thus not a part of the supply on this one?

When Samuleson said, "Nigerian rebels menace oilfields; prices jump," he could have just as easily said, "Terrorists blow up a pipeline in Iraq; prices jump", or "Iran rattles their "nuclear saber"; prices jump". Anyone with two brain cells to rub together would understand the point that if there is a disruption in the system of supply anywhere, "prices jump".
 
Written By: McQ
URL: http://www.qando.net/blog
Nigeria has seen a 100,000 barrel / day drop off in production in Feb 2006 (due to rebel activity?) and Iraq has seen a sustained 600,000 to 1,000,000 barrel / day reduction (due to invasion and subsequent problems?). Source.
 
Written By: Unaha-closp
URL: http://
Collusion in price gouging isn’t the whole picture, but it’s happening. It’s really happening

YEEHAW! those texans in their cowboy hats meeting in their secret bunker to determine collusion prices....kinda gives you an illuminati vibe, doesn’t it Joey?
 
Written By: shark
URL: http://
Our 3 big oil conglomerates ( "Our?" "what you mean ’ours’, Kimosabee? " ) produce crude oil as well as refine and distribute it. They benefit from high crude prices even if their refining margins are consistant, ( which hasn’t been shown to be the case either. )
Really? Well, let’s take just one ... the big one:
*During the period 1994 to 2004, ExxonMobil’s investments have added the equivalent of three average-sized refineries (at 125,000 barrels per day) to domestic capacity.

*U.S. refiners as a whole have increased the capacity of existing refineries by the equivalent of 20 new, average-sized refineries from 1994 - 2004, increasing U.S. distillation capacity by 12%, and light petroleum production by 16%. [note: that’s "capacity", not the number of refineries]

*Since 1981, output, including gasoline production, from all U.S. refineries is up by about 27%, even though the number of U.S. refineries fell by more than 50% over that same period.

*ExxonMobil is a net buyer of crude oil, purchasing 3.5 million barrels per day more than we produce for use in our refineries. We refine about 6 million barrels per day.
Do you remember what the price of a barrel of oil was between 1981 and 2004? Seems to me that if they were going to collude, that would have been the time to have done it - while they were making next to nothing on crude, and spending what they did make on exploration and the cost of expanding refinery capacity as much as they could.
 
Written By: McQ
URL: http://www.qando.net/blog
Would you consider "the impact of declining production in Iraq" as an "interruption in supply?"
Ah no - and why would you? If I were referring to declining production in Iraq you know what I would say?

"Declining production in Iraq."

Oil production has been declining in Iraq since we invaded. This is not some kind of "interruption." An interruption is

n 1: an act of delaying or interrupting the continuity; "it was
presented without commercial breaks" [syn: break, disruption,
gap]
2: some abrupt occurrence that interrupts; "the telephone is an
annoying interruption"; "there was a break in the action
when a player was hurt" [syn: break]
3: a time interval during which there is a temporary cessation
of something [syn: pause, intermission, break, suspension]
Is the some kind of delay in the continuity of oil production in Iraq? Nope.

Is the some kind of abrupt occurence interfering with the free flow of oil? Nope

Is there some kind of temporary cessation of the usual rate of oil production? Nope.

You make it sound like the decline in Iraqi oil production is some little bump in the road. It isn’t. It is systematic and fundamental. And there is no indication this decline is going to reverse itself in the forseeable future. If anything, it will get worse. Heard the latest? From the Independent, 5/1/06:
Teheran has attacked an anti-Iranian Kurdish group based in Iraq, it emerged yesterday, raising fears that instability there could spill over into the rest of the region.

Iraq’s defence ministry said more than 180 artillery shells were fired and Iranian troops crossed three miles into Iraqi territory before withdrawing.

The incursion, which occurred on April 21, came after Iranian claims that a number of attacks had been conducted against Iranian army and Revolutionary Guard posts in recent weeks.
Iran is attacking the Kurds? Great. That will surely help drive down the price of oil.

We didn’t create the problem in the Niger Delta. And no, we cannot control the demand by India and China. But we are responsible for the decline in production in Iraq. And we are also responsible for the destablization in the region due to our failure to secure Iraq, which will also raise the price of oil And it didn’t have to be this way, invasion or no invasion.

It is not simply an issue of greater demand or insurrections in African countries that are beyond our control. The Bush administration’s policies are literally driving up the price of oil.






 
Written By: mkultra
URL: http://
But we are responsible for the decline in production in Iraq.
I didn’t realize that we were the ones blowing up the facilities.

You have a very odd definition of "responsible", MK.
 
Written By: Mark A. Flacy
URL: http://
Ah no - and why would you? If I were referring to declining production in Iraq you know what I would say?

"Declining production in Iraq."
Really? So someone else signed your name to this?
Anyway, it is simply fascinating to watch those on the right - such as McQ - completely ignore the impact that declining production in Iraq has on the world’s oil supply, and the price of oil.
You need to head back to Clara’s for a memory course as well.
An interruption is

n 1: an act of delaying or interrupting the continuity; "it was presented without commercial breaks" [syn: break, disruption, gap]

2: some abrupt occurrence that interrupts; "the telephone is an annoying interruption"; "there was a break in the action when a player was hurt" [syn: break]

3: a time interval during which there is a temporary cessation of something [syn: pause, intermission, break, suspension]
Ah, so the "decline is production" in Iraq is permanent then? It wouldn’t qualify as a "disruption", "pause" or "suspension" of normal production?

And of course a ’decline in production’ could never be a "an act of delaying or interrupting the continuity".

Oh look, they used "interrupting" right there in the definition.

Heh ...
 
Written By: McQ
URL: http://www.qando.net/blog
The interruption taking place in Iraq is something like 150x more serious (in terms of oil production delayed) than the interruption taking place in Nigeria. That’s why what happens in Nigeria’s delta impacts your wallet in a relatively minor way compared to what is happening in Iraq.
 
Written By: Unaha-closp
URL: http://
That’s why what happens in Nigeria’s delta impacts your wallet in a relatively minor way compared to what is happening in Iraq.
Uh, OK ... but the point is the same. "Supply" means the whole ... not the whole minus Iraq.
 
Written By: McQ
URL: http://www.qando.net/blog

 
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