The Price of Oil and the Supply and Demand Myth

[louis c]

Well, let me see if I can explain this as I understand it. The repukes, McBush, and Kudlow crowd would like us to believe that the price of oil is strictly a case of supply and demand. I've researched this myth to the best of my humble ability and here's what I've got.

At the beginning of the Bush Administration (January 2001), oil was selling for about $26 a barrel. The worldwide demand was about 70 million barrels a day and gold sold for $264 an ounce.

Today, oil is selling for about $135 a barrel. Worldwide demand is about 85 million barrels a day and gold is selling for roughly $960 an ounce.

Let's see how my math holds out. The worldwide demand is up about 35% during Bush's term of office. Supply is up a little, but for the sake of argument, let's hold it constant.

The oil is priced in American dollars. Oil at 2001 prices, factoring in demand (35%) comes out to about $35 a barrel. Here's where gold prices kick in. I'm a firm believer that you can only price commodities in relation to gold, because it fluctuates the least of all standard currencies (hence it's value). Good as Gold.

In 2001, one ounce of gold bought 10 barrels of oil. Today, that same ounce brings you about 7 barrels. Amazingly, that amounts to about a 30% increase, nearly identical to the worldwide demand increase during the same period of time.

So, where is the extra $100 a barrel? In the declining dollar that can be attributed to a failed economic policy of cutting taxes, increasing spending, runaway debt, huge capital infusions from the fed (printing money with no backing), an endless war costing 2 billion dollars a week that is not financed through the budget. Get it. the oil price is a reflection of the colossal failure of this administration in both foreign and domestic policy. The increase in the cost of oil only has $10 to do with increased demand and has $100 to do with electing Republicans.

[rurallib]

1. sound reasoning to me.

[lostnotforgotten]

2. Non-Linear Relationships - Constrained Resource (Oil)

Re-think your math.

You might also like to spend time here:

www.theoildrum.com

[louis c]

3. How do you explain ...................

..........the accuracy in the relationship between oil and gold?

Eliminate the dollar as an instrument of measurement, and just explain the gold to oil ratio.

[BlooInBloo]

5. The point is that the real world doesn't operate on 6th grade math.

It's not incumbent on the poster to explain every irrelevant topic that might leap to your mind.

This might convey the essence of the truth:


http://www.eschatonblog.com/2008_04_20_archive.html#530818168492349871

[louis c]

7. My point is.............

Gold is the constant, not the dollar. If oil has spiked, why hasn't it gone up far greater and faster than gold? It seems gold and oil increases are about the same in relation to the dollar. Are we running out of gold at the same rate we are running out of oil?

[Hannah Bell]

21. Some 6th-grade math:

2004:

Production: 83.4 million bpd
Consumption: 82.5 million bpd
Net: + .9 million bpd (+328.5 million barrels = banked)

2005:

Production: 84.6 (+1.4%)
Consumption: 83.9 (+1.7%)
Net: +.7 bpd (+255.5 million barrels = banked)

2006:

Production: 85.4 (+0.9%)
Consumption: 84.8 (+1%)
Net: +.6 (+219 millions barrels = banked)

2007:

Production: 85.5 (+.1%)
Consumption: 85.8 (+1.1%)
Net: -.3 (-109.5 million barrels withdrawn from stocks)


Net surplus stocked = 693.5 million or 1.9 million bpd = 2.2% of 2007 consumption.

http://www.ssb.no/ogintma_en/tab-2008-04-28-12-en.html

If I were an oilman, why would I increase production (& costs) when I've already got surplus product from 2004-2006 to sell?

[Leopolds Ghost]

35. You misunderstand the oil market. It's impossible to "bank" 1 billion barrels as you claim

The figures you cite are underreported. Oil is a liquid resource that
flows from the supplier to the consumer. Your argument is like claiming
that the US is using less water than it is putting into municipal taps
and that someone is banking the missing tap water, using Enron tactics
to create water shortages in the Southwest. Ergo, no real water shortage
in the Colorado basin...

[Jack Rabbit]

4. Not a bad piece of analysis

You didn't need to assume that demand has stayed flat (I don't call a 35% increase flat anyway). I'm not sure that the price of gold can be pegged to the price of any other commodity. Another thing you left out is how many barrels of oil are being produced a day in 2008 as opposed to 2001.

However, you're right about the dollar and that's a big problem. As an American, I hate to say it, but the world market would do everyone, including us, a big favor if they started pricing oil in a stable currency like Euros. That way, at least we can get a better gage on how much the price of oil has risen. Then it would probably look like normal supply and demand. What the price at the pump is really reflecting is a falling dollar, not rising oil.

[louis c]

8. I'm sure there's more

but that would only strengthen my argument. For the sake of argument, let's hold it constant until some one comes up with an accurate figure.

[Speck Tater]

6. in 2004 production peaked at around 85 million barrels per day.

It has NOT gone up since then.

Meanwhile, demand has been:

2004 - 82.5 mbpd
2005 - 83.9 mbpd
2006 - 84.8 mbpd
2007 - 85.8 mbpd
2008 - 87.8 mbpd

Supply is NOT elastic. But as long as supply remained above demand there was no pressure on price.

Then in Q3 2007 through the present supply has exceeded demand. The result has been that the world market is bidding up the price of oil while drawing down global reserves. More and more poor countries are going without because they can't afford it any more. True, there are no gas lines in the U.S., but that's because we can afford to buy from the limited supply. The gas lines DO exists, however. They just exist in the poorer countries.

It is a pleasant fantasy to believe that a Democratic administration will make a difference to gas prices, but it is nothing more than a fantasy.

Supply and demand figures: http://www.ssb.no/ogintma_en/tab-2008-04-28-12-en.html
Map of 102 regions and territories with current energy shortages: http://www.energyshortage.org/

[Hannah Bell]

18. You'd better look at your chart again.

Production/Consumption million bpd

2004:

Production: 83.4
Consumption: 82.5
Net: + .9 (+328.5 million total barrels)

2005:

Production: 84.6
Consumption: 83.9
Net: +.7 (+255.5 million total)

2006:

Production: 85.4
Consumption: 84.8
Net: +.6 (+219 total)


2007:

Production: 85.5
Consumption: 85.8
Net: -.3 (-109.5)


2004-2006, production was higher than consumption, average surplus of .7 million bpd (=255.5 million/yr)

In 2007 only, production was lower than consumption, deficit of .3 million bpd (=109.5/yr)


Figures for 2008 are obviously estimates, since we just started Q3 this month (1/2 of 2008 yet to go), & no 2008 #'s are given for OPEC (or for total supply).

Price hikes began in 2004 & went up steeply 2005-06, yet 2005-06 production was in surplus.


Nevertheless, supply MET demand every period, since shortfalls were taken out of STOCKS (bottom of chart). In fact, the 2007 shortfall was only 1/2 the 2006 surplus, so stocks are still in positive balance.

[Leopolds Ghost]

36. Nobody stocks oil for years on end.

Unless you are referring to strategic government petroleum reserves, which are relatively small.

Increased demand means increased prices IN ORDER TO KEEP SALES CONSTANT
OR DECLINING in a commoditized ("capitalist") oil market that relies on
pricing end users out of the marketplace to regulate excess demand
of what is becoming a fixed (declining) resource.

If demand remained constant, sales would go down as supply went down and
prices rose to meet demand.

[HowHasItComeToThis]

9. IT IS NOT ABOUT SUPPLY & DEMAND

IT IS HOW HIGH THEY CAN RAISE THE PRICE AND HAVE YOU STILL BUY.

IT IS NOT FREE- MARKET

[unblock]

11. wow. that is EXACTLY free market.

and it's one of the major reasons why completely unregulated free markets suck, especially when essential commodities are owned by private interests.

[MindMatter]

22. If by "free market" you mean a cartel setting prices for an essential commodity

That is not my definition of a free market.

[unblock]

23. just because "free market" sounds good doesn't mean it IS good

i think we're talking about semantics. personally, i think "free market" a completely unregulated market, i.e., letting people get away with whatever they can get away with.

genuine capitalism includes proper competition, thereby making trusts, monopolies, and cartels near impossible. in fact, competition is at the heart of all the supposed advantages of capitalism. but then the right-wingers, corporations, and powers-that-be tout the benefits of capitalism and the virtues that arise from competition and use that to push for laissez-faire, free markets instead.

[louis c]

27. Bingo...1921 to 1931

That type of capitalism results in only one thing.

A depression

[MindMatter]

28. Nothing in that description resembles the oil industry

The oil companies of course try to get away with anything they can, but the principal instrument is government. They depend entirely on governments to give THEM leases on the cheap. They depend on governments to fight wars so they can have access to the resources abroad. That's not a free market.

A free market is more like when Microsoft or Segue invents something and markets it. But even in those cases, they depend heavily on governments to suppress the free market by giving them patent protections.

There is no such thing as a free market.

[unblock]

33. agreed. the oil industry is a public monopoly doled out to well-connected private interests

high oil prices work in the narrow interests of private owners of oil, but generally against the rest of the economy (other that the fact that sustained high oil prices makes alternative energy investments more attractive). the oil industry has long sought to maximize prices just shy of the mark at which alternative energy is attractive.

finally they saw it was time to reap the bonanza, perhaps as they recognized that alternative energy was not going to be delayed any further. so they jacked prices up to the moon and started "earning" more profit in a quarter than any company previously had in an entire year.

and, correct, all with government help in addressing international competition, fighting wars, manipulating prices (via the strategic reserve and military consumption), not to mention prevention of reasonable competition, and so on.


companies that get such obvious benefits from government should be taxed heavily to compensate. oil companies should pay iraq war tax. companies that might ever get a "too big to fail bailout" should pay too-big-to-fail insurance premiums to the government. and so on.

but naturally, that will never happen. it would make far too much sense.

[louis c]

34. good for you

you get my point

[yourout]

12. I call it extortion.

[louis c]

32. Extortion is another way to put it

[Leopolds Ghost]

38. Um... that is the MEANING of Supply and Demand.

[unblock]

10. your analysis doesn't reflect the price elasticity of oil.

we all learned in econ 101 that supply and demand form an "x" and the price is the intersection.
move the demand curve up and the price moves up and to the right along the supply curve. i.e., both price and supply go up.

it's all very intuitive. but just because the curves are usually drawn as straight lines at 45 degree angles doesn't mean that's the way reality is. particularly in the oil business.

the supply curve is nearly vertical. in the short run, they can only pump at capacity. no increase in demand or price will lead to greater supply once everyone's pumping at capacity. in the long run, sustained higher prices might lure the pumping or previously unprofitable areas, but that takes a sustain conviction that prices will remain sufficiently high to make such a venture profitable.

in any event, against a nearly vertial supply curve, move demand out even just a little and the price shoots up. essentially you have more and more people clamoring for nearly the same amount of oil. those who get the oil are those who are willing to pay a lot more, and those who can't pay a lot more suffer without.


the bottom line is that no simply math will tell you if the price of oil is too high, or is or is not artificially inflated. this is one of the major problems with standard capitalistic analysis. the wrong price dynamics means your assumptions about the supply and demand curve were wrong. i.e., there's always a way to rationalize anything that happens.

[zeemike]

13. Gotta recommend this one.

That is the kind of math I can uderstand...simple ant too the point

[BlooInBloo]

15. Simple, to the point, and fucking stupidass wrong.

[louis c]

16. Explain the Gold to Oil ratio

..then say it's stupid.

All commodities have increased dramatically in relation to the falling dollar. As a matter of fact, the Chinese and OPEC both are hording dollars so it won't collapse altogether. But you can't fool Gold. How is it that the same ounce of gold in 2001 buys the same amount of oil (less 30%) in 2008? That 30% is exactly the increase in demand for oil, worldwide. Explain that to my satisfaction, and I'll admit my idea is stupid.

By the way, in both 6th grade math and the real world, two plus two still equals four.

[MindMatter]

14. Here's all you need to know about the demand myth

When was the last time anybody had to stand in line to buy gas?

You can buy all the gas you want. No problem. There is no clash of supply and demand driving the price up. It is true that the increasing usage by India, China, and others has enabled the oil suppliers to accomplish their price gouging, but it is absolutely not being driven by demand.

The main drivers are:

1) the total destruction of the Dollar as a viable currency under the Bush regime. Oil is still settled in US Dollars, so Shell, Exxon, the Saudis, Hugo Chavez, and all the others controlling the supply want more dollars for the same juice. That is a far bigger factor than "supply and demand"

2) Sometime in the past 24 months, the oil states cam to the realization that we are at or past "peak oil" Before that point, the psychology was to pump as much of the juice as people would consume at any old price. Now they are starting to manage the end game. They are thinking about maximizing their transfer of wealth and capital so that they will be the dominant economic players even as their oil supply declines.

These are the two biggest factors -- and two things Bush and Cheney never want to have Americans understand, so that is why you almost never hear these factors mentioned in the American press.

[Hannah Bell]

19. You forgot the main one: stocks & housing are no longer looking like

good bets. Gotta put the surplus capital somewhere.

There's a pretty neat convergence between the decline in the housing markets & the run-up in oil.

[Hannah Bell]

24. Dollars to Euros 2003-08

12/03: $1.23
12/04: $1.34
12/05: $1.19
12/06: $1.32
12/07: $1.45
6/08: $1.56

http://research.stlouisfed.org/fred2/data/EXUSEU.txt

So the dollar's lost .33 cents of its value v. the Euro, or -27%, since 12/03.

The big hikes in oil prices started 2004:

http: //en.wikipedia.org/wiki/Image:Oil_Prices_Medium_Term.jpg

Price in 2004 averaging around $30/barrel, now at about $135, = +$105 = +350%.

The decline in the dollar doesn't seem to explain oil prices to me.

[Leopolds Ghost]

37. You ignore that pricing kills demand for shrinking resource. Shortages only occur w/ price controls.

Econ 101. And yes, that is why the Soviet Union had shortages,
and the US in the 1970s. That is what happens when you try and
lower the price of a commoditized, demand managed resource.

[eallen]

17. Supply and demand always meet. The problem is that 21% growth in 7 years....

That's the purpose of market prices.

The problem is that 21% growth over seven years is not much, given what the global economy is doing. That's about 2.7% annually. And most of that was in the early part of those seven years. The last few years, supply has barely budged.

Now, yeah, some of the price increase is the declining dollar. But a) oil trades on a global market, and b) the price of oil has gone up in Euros, Rembi, and the other major currencies also. This isn't just a US thing.

:hippie:

[louis c]

20. But it hasn't gone up more than 30% in Gold

Gold. gold. gold. Gold.

Please explain why the increase in oil demand and the increase in the cost of oil relative to gold prices are roughly the same. It's because the dollar is worthless on the world market.

[Speck Tater]

26. Demand and supply always meet?

Tell that to the starving children in Africa. Explain to them that their demand for food is somehow magically "always met" just because you say so.

[Leopolds Ghost]

39. Demand and supply always meet in a capital market -- by pricing others out.

High demand + low supply = high price that only a few are willing or able to pay for. That's what "supply and demand" means.

[Historic NY]

25. We even exporting oil at a rate of about 9% of total production.

http://indexmundi.com/united_states/oil_exports.html

<snip>
A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.

The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore
<snip>

http://www.forbes.com/reuters/feeds/reuters/2008/07/03/2008-07-03T184028Z_01_N02435397_RTRIDST_0_USA-OIL-EXPORTS-ANALYSIS.html

[neverforget]

29. In the last 4 years, the world has consumed 123.7 billion barrels of oil.

Does anyone think consumption can continue at this rate?

Total Oil consumed in 2004: 30,441,000,000
Total Oil consumed in 2005: 30,879,000,000
Total Oil consumed in 2006: 31,171,000,000
Total Oil consumed in 2007: 31,207,500,000
Total Oil consumed in last 4 years: 123,698,500,000

Oil fields deplete and the ones that have been found lately don't come anywhere close to filling the need for falling production from Alaska, Mexico and the North Sea. Just wait until the Saudis start their inevitable production declines. $4 gas is going to look very reasonable.

Figures used above are from this link http://www.ssb.no/ogintma_en/tab-2008-04-28-12-en.html

[mmonk]

30. Very good summation. You might want to add they are oil men.

[Dover]

31. A look at one company

Can someone here interpret this report? I'm curious about the last page which discusses a 'hedging schedule'. Not sure what it means, exactly. Are they scheduling their own hedging activity?

Anyway, the whole report is interesting in terms of their drilling activity in the Tx. Gulf.
Concho Oil presented this report at a recent UBS conference on oil and gas:

http://phx.corporate-ir.net/phoenix.zhtml?c=211775&p=irol-presentations
Download the UBS Global Oil and Gas Conference and then look at pg. 23.