3 specific questions re price of oil/gas. Please clarify for me.

[Phoebe Loosinhouse]

1. Is it that the price per barrel is not going up so much as the value of the dollar buying the oil is going down? Takes more devalued dollars to buy than previously.

Are other countries screaming about the price of oil too or or they just fine because their underlying currencies have held up? If all countries were as pissed off as we are about the price of oil, wouldn't we be hearing more about it and how their industries are also screeching to a halt? Wouldn't there be more and other countries trying to pressure OPEC to release more oil if it were strictly supply and demand as they are claiming?


2. Regarding releasing the Strategic Oil Reserves as Nancy Pelosi just advocated on Blitzers show:

This is oil that the US already OWNS. She seemed to be saying that releasing the reserve was putting it BACK into the world market in order to bring down prices. So, would we then be buying back for a lower price oil that we had already bought once already? How does this make any sense or help us?

I could see releasing the oil to ONLY American refiners to dilute the expensive oil with cheap or free oil in order to bring down the costs for Americans ONLY (a government subsidy, if you will)


3. How much domestic oil do American companies EXPORT? Why don't we pass legislation that says in exchange for all these sweetheart leases and tax subsidies, that domestic oil has to stay domestic?

If the oil companies don't like that and say screw you then we can say, ok, then you're going to be paying a lot more for the leases and forget about your subsidies.

[Frosty1]

1. As Oil Firms Seek Drilling Access, Exports Set Record

http://www.cnbc.com/id/25518912
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.

[Phoebe Loosinhouse]

2. Thanks for helping to get some real answers.

The only thing that is unclear is what percentage of that refined product had at its origin a domestic source which is what I'm really driving at.

[Kip Humphrey]

3. In general, American refineries don't refine to export. Because refineries are most efficient

running at 97%+ capacity and because they operate off long-term oil supply contracts, refineries export according to the 90-day supply. If the 90-day supply drops (as it has beginning in February '08), they market the anticipated excess production to foreign markets.

The fact is, there is no oil shortage. In fact, in the United States there is effectively a current surplus of refined product which has resulted in an increase in exportation of same.

While OPEC and the trans-national oil companies have actively sought $110-120/barrel oil since 2000, they do not like the current volatility caused by commodity speculation. This volatility is uncontrollable, unpredictable, and interferes with oil companies E&P planning for their 90-day supply chain. The price chaos is already effecting price hedging (via hedge funds) by legitimate (real) oil traders and will likely spread to refineries (especially independents) in the near term resulting in bankruptcies in the oil patch (bizarre as that sounds).

[Phoebe Loosinhouse]

4. You are very knowledgeable.

Imagine there being a surplus of refined product in the US that causes an increase in export! Now that is something that is not being reported at all. At least that's the first I've heard of it.

Do you have any insights about questions 1 & 2?

[Terry in Austin]

5. Oil prices

People are quick to point out the decline of the dollar or intensified speculation as "the" explanation for rising oil prices. While these factors do add a premium, they don't account for the most significant portion of the price.

The fundamental driver of price is still supply and demand. Flat production of oil and continued growth in demand create a shortfall, and that drives up prices. EIA stats show that production has been essentially flat since 2004. Meanwhile, demand continues to grow at an average of 1.5% per year. Demand is outrunning supply.

It's worth noting that oil and gasoline are very "inelastic" commodities: people don't stop buying it when the price goes up. It takes a very steep increase in price to reduce demand by even a small amount. According to a recent study by the Congressional Budget Office, gasoline has a price elasticity of about -.06, meaning that it takes a 100% price increase to reduce demand by 6%.

Amazingly, supply and demand as the price driver is still a controversial point, since many people are in deep denial about global oil decline. Our whole car-centric, consumer-industrial lifestyle relies on cheap and plentiful oil, so the passing of it can be difficult to accept for some. A good clearinghouse of information on current energy issues is energybulletin.net. Highly recommended.

As to the Strategic Petroleum Reserve release: the idea that this would have a real effect on prices is either desperate, naive, or an out-and-out pander-job. Prices are set globally, where there is an 86 million barrel per day habit to feed. The total contents of the SPR is a little over 700 million barrels -- very difficult to "flood the market" with that relatively small amount. And then it would be gone. The SPR is supposed to be for emergencies, where the very availability of oil at any price is in question. Better to leave it for that purpose.

Hope this helps.

[Hannah Bell]

6. World 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)

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


2004-2006, production > consumption, average surplus of .7 million bpd (=255.5 million b/yr)

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

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

Nevertheless, supply met demand every period; shortfalls were taken out of STOCKS (bottom of chart). In fact, the 2007 shortfall was only 1/2 the 2006 surplus, so world stocks are still in positive balance 2004-07, let alone what was stockpiled before.

US SPR = 706 million barrels. World consumption at 85 million bpd = 31025 bp year, so SPR = 2.3% of 1 yr's world consumption - not a negligible amount, & certainly theoretically able to move prices if released, esp in US which consumes 25% of world supply.

SPR currently at record high level: total capacity is 727 million barrels.

"people don't stop buying it when the price goes up."

US consumption is off 3-6%, depending on where you start from: that's huge. Drop in US consumption 4/08 extrapolated for the yr wipes out total WORLD demand growth 2006-2007.

[Terry in Austin]

8. Demand destruction works, then

No surprise, because we've reached the point where supply no longer increases, regardless of demand. It's the increases in price that cause people to use less. They'd rather not use less, and are willing to pay a great deal for the privilege, so the price has to be high enough to discourage enough of them to bring demand back in line with supply. That's price elasticity.

Global production has been at a plateau for several years, and is just beginning its permanent decline. We can expect the demand to trail it on the way down, always on the verge of outrunning supply, with prices destroying excess demand, until oil becomes relatively unimportant.

By then, we'll have accepted the idea of a post-oil world and made the massive changes necessary to accommodate it. Meanwhile, we need to get started, oh, about twenty years ago.

[Hannah Bell]

9. But you said demand is inelastic. Now you say it's not.

When price goes up, demand goes down. That's an economic first principle. No new information is added by labeling this "demand destruction," unless you mean to suggest prices were deliberately raised to reduce consumption.

The numbers show supply outpaced consumption, resulting in increased stockpiles, until 2007: & the world is still in net positive balance v. 2004 supplies.

How you get "supply no longer increases, regardless of demand" from 1 year's evidence, I don't know. You have no inside track to secret info or producers' decision-making. It's just as likely production slowed because inventories were increasing - standard business practice. Particularly when profits are good.

[Terry in Austin]

10. No secret info

You have no inside track to secret info or producers' decision-making.

Well, it's definitely not a secret! And sadly, it's not a matter of producers' decision-making, either. It's a matter of geology. A lot of people knowledgeable about the oil industry are finding more and more evidence that global oil production will never exceed present rates by any significant amount. If you're interested, you might try Matthew Simmons, or Kenneth Deffeyes, or ASPO, or Energy Bulletin, or The Oil Drum.

Right here at the peak, we're looking at several years' worth of precarious touch-and-go between supply and demand. Shortfalls, as you point out, are being filled from stockpiles, but also increasingly from "stunt" liquids like natural gas liquids, tar sands, ethanol and the like. If you look at production data and field analyses for the actual black stuff, the picture gets a good bit sharper.

The point is, demand HAS to go down, because that's what supply is doing, longer term. The term "demand destruction" is usually associated with the higher prices that bring demand back in line with supply. That's the traditional market mechanism, although demand could also be brought down by intervention such as rationing.

"Price elasticity" is just a way of quantifying how much demand destruction is achieved by a given price increase. It's not an either-or proposition: some commodities are less elastic than others; oil and gasoline are very inelastic. Conveniently enough, it's possible to quantify "very" -- in this case, it's -.07 and -.06, respectively.

[Hannah Bell]

11. i see supply > consumption 2004, 05, 06. Therefore shortage isn't

the reason for the 450% price hike.


"Facts of abundant oil supplies in global markets are now also being acknowledged and reported by mainstream media. For example, Ed Wallace of Business Week recently reported that "that worldwide production of oil has risen 2.5% in the first quarter, while worldwide demand has grown by only 2%. Production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter. The net result is that the US daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 million barrels in excess capacity today."

Wallace then asks, "So what is going on here? Why would our Energy Secretary say there's a supply and demand problem when none exists? Why would he say that speculators have little or nothing to do with the incredibly high price of oil and gasoline, when it's clear they do? President Bush--a former oilman--gives the ever-growing demand for gasoline as the primary reason prices are so high, yet that notion can be dispelled with one minute of research."

http://www.alternet.org/waroniraq/91226/?ses=90199afda271d8776163a80e42f549c0

[Terry in Austin]

12. If you say so.

So, you've eliminated market supply and demand as the reason for price hikes. However, the "real" reason remains a mystery. Or does it? You tell me.

Check back in a couple of years, we can see how the supply is doing.

Wouldn't advise buying an SUV, though, even if they're hitting bargain prices.

;)

[Hannah Bell]

7. 1. Is it that the price is not going up so much as the dollar is going down?

No.

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

us price up 213%, canadian price up 113%, same trajectory.

http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=24

Protests about price rises across the globe.


2. Regarding releasing the Strategic Oil Reserves

http://fossil.energy.gov/programs/reserves/spr/spr-facts.html

According to the SPR website, it's at historically high level, price ~$28/b, contains equiv. of 2.3% of 1 yr's world demand (706 million barrels).