I have always believe that the dramatic increase in the price of oil is not just due to supply and demand. I mean the price has almost double in one year and the demand certainly has not gone up that much. As I mentioned before a lot has to do with speculation in the futures market. Some has to do with the weakness of the dollar. But I had no way of figuring exactly how much each factor was worth. Today on ABC news some expert quantify this for me. I don't know how accurate these figures are and I am sure even the best economists can't be sure. The current price is over $135 per barrel. According to their calculation, if it is just a matter of supply and demand the price should be about $75 per barrel. This would be about 7% increase from a year ago which is reasonable given the increase in demand. But this report said that specualtion adds $30 to a barrel and the weakness of the dollar adds $20. This still leaves $10 due to various causes. I think this is a reasonable calculation. One news item that show that speculation had an impact was that last week China announced that it would decrease subsidy to gasoline and thus increase retail price. This would eventually decrease demand. But the demand obviously did not decrease overnight as the price increase had not gone into effect yet. Nevetheless the next day the price went down more than $4 per barrel, indicating that the speculators are anticipating the decrease in demand and thus lower the bids. A true supply demand market would not have changed the price that quickly.
In a related item, three law school professors wrote in the LA Times that we should sue OPEC for fixing prices. I already wrote before condemning Congress for suggesting we should sue OPEC. Of course, Congress is made up mostly of lawyers and so we should not be surprise. Think about it, what right do you have to demand that someone sell something they have for a price that you like? If we have the oil reserve like they do, would we sell it to other countries at a price they want, as much as they want? Eventually the oil will run out and countries like Saudi Arabia are trying to maximize their profit just like anyone else would. They have an interest of not letting price go so far up that other countries would turn to alternative energy sooner. What makes anyone think that they would pay even if they lose in court? They would just ignore us and make more deals with China and India. We have three ways to drive down OPEC prices: make quick progress in alternative energy, decrease usage, or use military force. You decide.
Monday, June 23, 2008
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Yeah, supply and demand looks like it doesn't even effect prices right now. Everything hinges on futures and the traders are going crazy. It doesn't help when OPEC and Libya say they're cutting production and that prices will rise. I just don't understand how companies and the our government didn't think of the future. Gas mileage on cars seems to be lower than they were 10-20 years ago. What happended to all those fuel efficient cars I remember seeing that got 40 mpg? Oh yeah, people are buying them up on eBay. Now we're trying to get this E85 crap into the market but corn prices have gone up and they refuse to look into ethanol made by other sources like algae. Even still if we ever switched to ethanol, you still have to have some gas in it don't you? Diesel used to be such a great option but who wants to pay $5/gal for diesel?
ReplyDeleteMaybe the next president can get this economy on the right track and the dollar gains back and this will help.
At this point it looks like we're headed down a path that will change things forever.
By the way, bus ridership is up about 20% in Detroit, which is pretty interesting. I've noticed quite a few people in suits jumping on buses lately. The other thing I've seen were a couple of buses that broke down recently. They must not be used to handling all these people!
-LBOAYM
This is what I predict: Prices with go up over the next several months to maybe 160-170 per barrel. Then the big speculators will use an excuse like say McCain wins and authorizes drilling in Alaska and offshore. This will help very little in reality but will have a psychological effect on the market. Another turning point would be say China's economy stops growing post Olympic due to fuel prices and lack of exports. Speculators will use these excuses and drive down the prices to around 100, 80 if the dollar becoming stronger for some reason. The thing about speculators is that they can make money either way but the difficult part is to make either the seller or buyer panic. So either McCain wins or China declines will drop prices even if there is not a big shift in the supply-demand reality.
ReplyDeleteThe lower price will diminish our will to change things and over the next couple of years the prices wil graudally rise again as demands increase again.
Interesting prediction, though you kind of contradict yourself when you say that McCain's election would in some way cause the price of oil to come down. A few posts ago I suggested that the election of a new president would do that and you said it wouldn't.
ReplyDeleteThough I think at the time you weren't considering that prices were inflated due to speculators.
I myself am not sure what to expect no matter who gets in office now. I thought that going over the $100/barrel threshold would be hard, but it happened so easily.
Every week the price of oil seems to go up and just when you think it can't go any further, it hits a new high. It looks like we're in for a long summer.
At this rate, I agree we'll see about $150-$160 by end of summer. Now if there are hurricanes and other natural disasters, look out.
I am also thinking that demand will be higher in August when the Olympics are on. I doubt any foreigners will walk to the games so as the world converges on China, we'll see a lot of demand for fuel which might spike prices up even further. The question is whether they've already accounted for that.
What do you think of this off shore drilling? I'm not necessarily against it but there really isn't any short term gain with it unless it's mental like you said.
Whoever steps into office has to push for alternative energy. Does that mean that McCain is good for a short term boost in the economy and Obama is better for the long term?
Does the government keep costs artificially higher so that we don't fall back into using more oil?
-LBOAYM
I think I said that no matter who the president is the OPEC countries will do what is best for thier own interests and so will not lower their prices base on who is the president. I don't think McCain himself would be able to lower the price but that speculators may use his calling for offshore drilling and possible Alaska drilling as an excuse to drive the prices lower (after the speculators believe they can't make more profits by betting that the prices will go higher). So I don't think the election of McCain will cause prices to come down but it can be an excuse the speculators use to bring down part of the price increase. There are other excuses the speculators may use and McCain's election then would have no effect at all.
ReplyDeleteAs I said before I don't care if they drill in Alaska since nobody is there to see the pristine nature there anyway. Off the coast of California there are lots of people who come for the view so oil rigs would look very ugly to lots of people. An oil spill here would make the disaster of the Exxon Valdez looks like a toilet overflow. But in both cases drilling in Alaska and off-shore will not have any real effect on our dependence on foreign oil. You are right that only alternative energy will save us in the long run. I don't know if Obama or McCain will be better to encourage alternative energy. I am betting Obama only because of ties with Gore and the fact that the Republicans are more tied to the oil companies. There are no short term answers.
Well I thought the offshore drilling would more likely occur in the Gulf of Mexico. I don't think it could happen in California because Arnold says he's against it. There will be a battle in Alaska for sure.
ReplyDeleteInteresting that the Iraq oil fields have been opened up to American companies for bidding. They say that they want to double output. Will that help at all or will we just see the oil companies make more and more billions?
I think that Obama would push for alternative energy more so than McCain. But it's a tough political battle. If he has enough support in congress it can get done.
There's been more talk that Romney will be the VP choice. Supposedly McCain needs western votes and his mormon ties to the west will help McCain. I just don't see these guys working well together. But I guess they don't really need to when votes are all that matters.
-LBOAYM