Quote :

"^ The most commonly known would be the "Strategic Petroleum Reserve" being held by the United States which until just recently was being filled at a rate of thousands of barrels a day. Conversely, there are many other countries that have similar reserves as well as other products (such as gasoline)."

Yes, I am aware of our reserve, and thousands of barrels a day on top of 20 million is nothing. Which brings me back to my point, does there exist enough storage locations scattered around the globe that speculators can drive the cost of it up and actually have a place to put it, or is this all paper trading?

When do the prices begin to go back down from the result of all this "stored' oil being flooded back out onto the market?

I think what frustrates me the most about the price of oil is I don't think I have ever seen a real clear picture...and by clear picture I mean a factorized breakdown....of how it was so cheap and how in such a short time the cost has skyrocket.

7/17/2006 4:16:59 PM

^ I now see the answer you seek: the world's combined long-term storage capacity amounts to a single week's consumption (thereabouts). However, no conceivable disaster could ever cut off all the world's productive capacity. For example, if Saudi Arabia was unable to export any oil the world could get along for well over a month at current consumption (assuming it could be gotten to where it was needed quick enough). Which means that if all other risks went away and oil speculators believed a "Saudi Arabian blockade" would end within that time frame then the price of oil would not become apocalyptic.

As for the "clear picture" you requested, all I can do is summarize the theory of price rationing (the meadows/scrubland metaphor from the 17th century comes to mind).

As you know, in a free-enterprise economy we use prices to allocate resources, but how are the prices fixed? Imagine if you will a market in which both producers and consumers have extreme difficulty changing their patterns (consumers take years to start conserving, producers take years to boost production). To oversimplify, such a market will often operate in two distinct modes when deriving prices: a buyer's market and a seller's market.

In a buyer's market, any consumer capable of utilizing the good is already doing so, there is a market glut. In this market the price is being set at a point low enough such that sufficient producers shut-down to restore quantity equilibrium. In other words, the next barrel of oil will cost more to produce than it will sell for, a ridiculously low price given most costs are upfront fixed costs such as exploration and drilling, compared to which pumping is cheap.

In a seller's market, and producer capable of boosting production in the short-term has probably already done so, there is shortage. In this market the price is being set at a point high enough such that sufficient consumers reduce usage to restore quantity equilibrium. In other words, the next barrel of oil will cost more to buy than it will produce, a ridiculously high price given most usages are marginal anyway. For example, if today you spend 2% of your annual income on gasoline to drive to work, the price would need to go up 50 fold before driving to work was no longer profitable.

What this means is that the price is going to be ridiculously low as long as surplus capacity exists (the natural state for most markets) but once that last produced barrel of oil is spoken for, like a bit, the market switches modes and prices are no longer being set by producers but by consumers. As has been demonstrated by history, people are willing to pay far more for gasoline than they are usually being charged.

Again, such market rules usually only apply to industries with high up-front costs and poor substitutes such as airlines, railroads, real-estate, and commodities.

[Edited on July 18, 2006 at 1:46 AM. Reason : .,.]

7/18/2006 1:45:17 AM

So the price of a barrel of oil has been dropping steadily over the last few months but the price of gas at the pumps hasn't gone down at all over the past two weeks. There was the initial drop which was quite good but I was expecting to see prices continue to drop as the price of a barrel of oil dropped. Futures also appear to be going down.

Just looking for an explanation from LoneSnark as to the other variables I'm overlooking (no sarcasm there).

10/11/2006 8:00:27 AM

Well, as you see, the price of gasoline has fallen, it has actually fallen faster than oil. The price of oil has fallen by 24% from its high around $77. Gasoline has fallen 37% from its high around $2.41 (the price of gasoline was inflated by a shortage of refining capacity, it is no longer).

http://www.raleighgasprices.com/
Now, it makes more sense to compare the absolute terms when thinking of regional versus the NY Spot Market. The NY spot market has fallen 89 cents from its peak three months ago. Well, here in Raleigh the price is now at $2.18, and that is from a high of around $3.01 in early August, a drop of 83 cents. It is still falling, as you can find stations selling for $2.05 right now.

10/11/2006 8:49:29 AM

Just curious. The gas station across the street is usually the cheapest around and they haven't dropped the price in about two weeks despite the continual drop in the price of oil. They are usually the first to drop. Maybe they dipped way low early on (they have been at $2.09/g for two weeks) and the drop in crude is just now catching up to the point where they will drop some more.

Oh well.

Still waiting on that $1.15/g that some people were claiming would happen within a few years.

[Edited on October 11, 2006 at 9:34 AM. Reason : -]

10/11/2006 9:32:07 AM

You will have to wait at least another year, possibly more.

And hopefully it wont fall below $1.40, otherwise we will face yet another cyclical collapse. But that is unlikely given China's growing resource intensity.

10/11/2006 10:17:27 AM