Well, high gas prices really do seem to be a political lightning rod right now, and even though js80 has said that the markets have proved that demand is inelastic (I'm guessing up to say some level - say $80 - $100, based upon various commentary I've seen on CNBC about what people think oil is really worth), at these very high prices (over $100 sustained?), oil demand may no longer inelastic.
Think gas prices above $4, where people are supposed to actually start changing their driving habits.
Think gas prices above $4, where people are supposed to actually start changing their driving habits.
To me, that just means the supply-demand relationship is nonlinear. I don't see that as a problem so much as a fact. Production expenses are nonlinear, nor are refining costs. Therefore, if I incrementally increase demand, price will go up superlinearly. I could have told anyone this five years ago. Maybe the futures market enables this to happen at a faster rate or with some overshoot - that I part don't understand well. But the end result must be the same, perhaps with some phase shift involved due to futures effects.
"What it's worth" is tricky with inelastic goods, because demand remains constant no matter the price. I did not offer a "grand conspiracy," I merely conjectured that previously Oil producer nations were afraid to push oil higher because they didn't want to be blamed for being the cause of a global depression. However, recent trading data has shown that the global economy can withstand $100 oil. The OPEC companies just simply sat back while the hedge funds did all the dirty work "discovering the true price of oil."
I'm not going to argue what oil is really worth because it is pointless. I WILL however illustrate that without speculation, oil would not have hit $140.
mshan: Spot price, i.e. futures quotes, are based on latest bid/ask in the futures market. I suspect a lot of oil that is shipped/purchased at the docks base their own spot sales on the latest bid/ask in the electronic markets. But a lot of the oil that is traded like that are based on long term contracts previously entered.
Demand for oil may be inelastic, but demand for oil is not constant. Demand destruction did occur by people opting to use less of this high priced resource. People drove slower, less, car pooled and took public transportation. IF you have noticed lately, packaging has become far more volume efficient. Demand for oil has gone down and prices have dropped to reflect this demand change. High prices are bringing the supply/demand curves back to equilibrium.
Not only that high prices have driven the US to have its highest active rig count in the last 20+ years and US production is starting to creep upwards.
Just remember, the cure for high prices, is high prices.
I don't think it is tricky. People pay what it is worth because it is worth what people pay. Oil is not the same as water, as I've pointed out numerous times in this forum, and people can actually live without it. If people pay what you consider an inflated price, then that is what they feel it is worth. Nothing is completely inelastic, as recent drops in oil demand have demonstrated. Unfortunately, I don't think theories of nonlinear elasticity are as developed in economics as we have in engineering.
Please do.
I hope you guys are profiting off of your expert knowledge of the oil market. :roll: Anybody who could predict it would be a multimillionaire.
Queasy
Moderator<br>Console Gaming
- Aug 24, 2001
- 31,796
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Oil rigs off the coast of California could be producing in about a year or two years. Why? Because the rigs already exist and we already know exactly where the oil reserves there are and it is relatively easy to get to.
Oil off the coasts of Alaska, Florida, and elsewhere will take 5-10 years. Sounds like we should have gotten started yesterday.
BoomerD
No Lifer
- Feb 26, 2006
- 66,311
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If we start drilling tomorrow, and (just for the sake of the discussion) oil was flowing by the end of the week, where would it go? Would the oil companies just sell it to the highest bidders (Like China and India) or should that oil be kept in the USA?
IF the oil stays here and is used to eliminate our dependance on foreign oil, (as so many advocate) then I MIGHT support some drilling off-shore, but if it just ends up in the "big world oil pool" to make more money for Big Oil, I won't support a single rig off our coasts. Just by adding to our own oil supply would put more foreign oil on the open market, and (if supply and demand are really the causes of high prices) that should cause serious price drops.
BTW, oil drilled and sold in the USA shouldn't be sold to Americans at the ridiculous "world oil prices" that we're paying now. It costs less to drill, costs less to transport, and should thus cost us less to buy.
IF the oil stays here and is used to eliminate our dependance on foreign oil, (as so many advocate) then I MIGHT support some drilling off-shore, but if it just ends up in the "big world oil pool" to make more money for Big Oil, I won't support a single rig off our coasts. Just by adding to our own oil supply would put more foreign oil on the open market, and (if supply and demand are really the causes of high prices) that should cause serious price drops.
BTW, oil drilled and sold in the USA shouldn't be sold to Americans at the ridiculous "world oil prices" that we're paying now. It costs less to drill, costs less to transport, and should thus cost us less to buy.
Yep thank gawd it was all speculation
Wait. . . . .
Oh thats right its still 10X what it was 10 yrs ago, production has stagnated at about 86 Mbpd and even though Americans have reduced demand 5 % Asia is more than making up for that, there are less exporting countries than ever and domestic demand of OPEC nations is biting into what is available for export with ONLY Saudi being able to increase exports
Yep things are fine
Wait. . . . .
Oh thats right its still 10X what it was 10 yrs ago, production has stagnated at about 86 Mbpd and even though Americans have reduced demand 5 % Asia is more than making up for that, there are less exporting countries than ever and domestic demand of OPEC nations is biting into what is available for export with ONLY Saudi being able to increase exports
Yep things are fine
I'm wondering if you could provide links to information regarding the existing offshore infrastructure and its status.
I would also appreciate any confirmation on the success of the exploratory wells from the past from which you plan to draw this oil in ""about a year or two years"". I would also appreciate any information regarding the pipelines in which you plan to transport this oil and the existing refineries from which your 'plan' anticipates processing it into a usable product.
Not that I don't believe you (actually I don't but that's beside the point).
You see, the only information I have been able to find says the the "unavailable for lease technically recoverable undiscovered oil resources" off the coast of California is between 9 and 10 billion barrels.
And that there currently exists an estimated recoverable 41 billion barrels already under available offshore leases in the lower 48.
I guess the people who developed your "plan" are smarter than the Energy Information Administration. Not that I'm calling FUD on your 'plan' (but I guess I am).
And then there is that pesky matter of manpower and infrastructure. There is a shortage of oil industry workers in case you didn't know (from the 'roughnecks' to the engineers). The companies that build oil rigs will not talk to your 'people' for the next two or three years (they are kinda busy right now with existing orders through 2010 and beyond).
Ahhh. I almost forgot that pesky matter of refinery capacity.
Nonetheless, I'm willing to look at any credible information that will back up your claim that Oil rigs off the coast of California could be producing in about a year or two years.. How 'bout some links?
Until then I think I'll reserve judgment (and the future opportunity to call FUD without substantial legitimate verification by you of the claims you have made).
- Sep 29, 2000
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FWIW I've heard "a decade" for offshore drilling and also I have read either 2 or 3 (cannot recall) I read about three weeks ago from a reputable oil man. I would say that there is no consensus among everybody on how long it really would take to get oil. Of course, as we all know, this debate has been raging for more than the worse-case anyway.
And this is exactly the same reason why oil companies are making tens of billions of dollars in quarterly profit! Mind you that is "B" as in 1,000 millions every 3 months! And I won't be surprised some speculative buyers are actually working for the oil companies or the so called "pawns".
This is how the futures market works:
B = Buyer
SB = Speculative Buyer
S= Seller
S comes in offering Oil at the beginning of the month at $30.
SB comes in quickly and buys at $30.
SB offers for $35.
SB2 buys for $35.
SB2 offers for $40.
SB3 buys for $40.
...
...
...
SB40 offers for $100
B buys for $100.
What would the price have been if there were no speculative buyers? $30.
This isn't exactly how it works in the real world, but it's a VERY SIMPLE illustration to show up speculation does indeed push prices past what it could have been at. Plus "true value" of an inelastic good is very tricky.[/quote]
So do you agree with me that it is criminals?
B = Buyer
SB = Speculative Buyer
S= Seller
S comes in offering Oil at the beginning of the month at $30.
SB comes in quickly and buys at $30.
SB offers for $35.
SB2 buys for $35.
SB2 offers for $40.
SB3 buys for $40.
...
...
...
SB40 offers for $100
B buys for $100.
What would the price have been if there were no speculative buyers? $30.
This isn't exactly how it works in the real world, but it's a VERY SIMPLE illustration to show up speculation does indeed push prices past what it could have been at. Plus "true value" of an inelastic good is very tricky.[/quote]
So do you agree with me that it is criminals?
I dug this out of my notes on Big Oil from 2005. It came from the US Department of Energy - I'll keep diggin' and see if I can find more current numbers ...
The breakdown of a retail price of $2.27 per gallon of regular oil (89 octane) for an average price of crude oil of $50.23 per barrel in 2005:
Cost Category Percentage
Per Gallon of Gas
Crude oil: 53% ($1.20)
Federal and State Taxes: 19% ($ .43)
Refining Costs and Profit: 19% ($ .43)
Distribution and marketing: 9% ($ . 21)
IIRC there are 42 gallons of gas per barrel so those numbers (on crude) look pretty close.
What I can't reconcile at this point with any accuracy is the actual cost of production of a barrel of crude. Hold onto yer panties, boys, because in my notes I also found that it costs Saudi Arabia $14 to pump a barrel of crude (which would be $ .33 / gallon).
The problem is I didn't write down what year that was ... ... it may have been 8-10 years ago - lol.
I'll keep diggin' ...
The breakdown of a retail price of $2.27 per gallon of regular oil (89 octane) for an average price of crude oil of $50.23 per barrel in 2005:
Cost Category Percentage
Per Gallon of Gas
Crude oil: 53% ($1.20)
Federal and State Taxes: 19% ($ .43)
Refining Costs and Profit: 19% ($ .43)
Distribution and marketing: 9% ($ . 21)
IIRC there are 42 gallons of gas per barrel so those numbers (on crude) look pretty close.
What I can't reconcile at this point with any accuracy is the actual cost of production of a barrel of crude. Hold onto yer panties, boys, because in my notes I also found that it costs Saudi Arabia $14 to pump a barrel of crude (which would be $ .33 / gallon).
The problem is I didn't write down what year that was ...
... it may have been 8-10 years ago - lol.I'll keep diggin' ...
Queasy
Moderator<br>Console Gaming
- Aug 24, 2001
- 31,796
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Link
Oh, and here's a nice little quote for people complaining about the acreage already under lease that the oil companies are allegedly just sitting on for no apparent reason.
As for the workers and equipment. Wow, it sounds like that could be quite the boon to the economy if more people were hired to work on oil rigs and companies were hired to make more equipment...
Though, I am now concerned about the escalating war between Russia and Georgia will mean to gas prices (as opposed to just being concerned about the fighting in general). The gas prices will likely take a hit on Monday since Russia bombed a Georgian oil pipeline.
I like Investors Business Daily, but that article linked above reads more like an op-ed piece, rather than a serious piece of investigative journalism.
Not saying that some of the info in the article isn't true and definitively a positive contribution to this thread, but it honestly sounds like they are pushing a particular political position, rather than just presenting the facts from both sides of the argument.
"California's 10 billion barrels in offshore oil could be brought to market in as little as a year "if the moratorium were lifted," according to a recent Sanford C. Bernstein report said, citing that the oil is under shallow water and drilling platforms already exist."
This Sanford C. Berstein report seems to be the only non-partisan source cited in the article, and there is still no mention of how much daily output this drilling would add to total global daily supply, and how quickly it would ramp up to that capacity. Plus if all available rigs and manpower are already being utilized and are booked for years forward, the point is moot.
Not saying that some of the info in the article isn't true and definitively a positive contribution to this thread, but it honestly sounds like they are pushing a particular political position, rather than just presenting the facts from both sides of the argument.
"California's 10 billion barrels in offshore oil could be brought to market in as little as a year "if the moratorium were lifted," according to a recent Sanford C. Bernstein report said, citing that the oil is under shallow water and drilling platforms already exist."
This Sanford C. Berstein report seems to be the only non-partisan source cited in the article, and there is still no mention of how much daily output this drilling would add to total global daily supply, and how quickly it would ramp up to that capacity. Plus if all available rigs and manpower are already being utilized and are booked for years forward, the point is moot.
Oil was a bubble, it's popping. Anybody not getting it are the same fricking idiots saying housing wasn't a bubble.
3chordcharlie
Diamond Member
- Mar 30, 2004
- 9,859
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Originally posted by: CycloWizard
I don't think it is tricky. People pay what it is worth because it is worth what people pay. Oil is not the same as water, as I've pointed out numerous times in this forum, and people can actually live without it. If people pay what you consider an inflated price, then that is what they feel it is worth. Nothing is completely inelastic, as recent drops in oil demand have demonstrated. Unfortunately, I don't think theories of nonlinear elasticity are as developed in economics as we have in engineering.
Please do.
You are (both of you) applying a very juvenile definiton of 'inelastic'. You're also freely switching between 'short-run' and 'long-run' effects of price changes.
Cyclo, if you think people always and only pay 'what something is worth', then why, when oil was $9 a barrel, was nobody voluntarily throwing in an extra $20/fillup at the gas station, if the oil was 'worth' so much more to them than the posted price?
We can spend all day making graphs of 'marginal' and 'average' demand, and use new and used car sales/prices to try to map out what people really think oil is 'worth', or you can actually stop being obtuse instead of only saying you don't want to be.
Please educate us rather than just name-calling. I know a good deal about the theory of elasticity. That economics has borrowed it to describe financial systems makes me think they are connected. The idea that something is "inelastic" is analagous to the idea of a rigid body - it's an approximation that holds in some limiting cases. However, it's obvious that it does not hold in this case because the price and demand have followed each other in some fashion.
We can spend all day making graphs of 'marginal' and 'average' demand, and use new and used car sales/prices to try to map out what people really think oil is 'worth', or you can actually stop being obtuse instead of only saying you don't want to be.[/quote]
And you can tell me why I'm wrong, or you can just call me names and try to denigrate me. The bottom line is that people will pay what they feel something is worth at that time, short of someone holding a gun to their head and making them do it. Since I have yet to observe this, I can only assume that people think that the gas they are buying is worth what they are paying for it.
3chordcharlie
Diamond Member
- Mar 30, 2004
- 9,859
- 1
- 81
There is really no such thing as perfectly inelastic demand. In economics, elastic and inelastic are used to describe the degree to which one quantitative measure responds to changes in another. Gas would be considered quite inelastic in the short-run, because when the price changes today, you still have to go through with your plans for tomorrow (like going to work). People can't make drastic changes immediately, so demand for commodities tends to be inelastic in the short term. If the price of gas fell to $1/gallon tomorrow, thousands of people would still drive their Prius to work, because they hadn't had time to trade it in on the Ford Explorer they could now comfortably afford to drive.
And you can tell me why I'm wrong, or you can just call me names and try to denigrate me. The bottom line is that people will pay what they feel something is worth at that time, short of someone holding a gun to their head and making them do it. Since I have yet to observe this, I can only assume that people think that the gas they are buying is worth what they are paying for it.[/quote]
'What something is worth' is a nebulous concept, and many people have guns to their heads all the time, especially in today-tomorrow-next-week time-frame.
Try to think of it this way: No matter the price of gas, you will drive to work tomorrow, in whatever vehicle it is that you drive. You will do this because you need to, and you would do it (for one day) even if the gas cost more than your pay. We can be pretty sure of this, because most of us, for one of our teenage jobs, had circumstances that forced us to spend more than our lousy pay on a cab-ride to make a shift. (Broken car, unreliable ride, missed the bus, slept in, whatever).
Obviously this is an unsustainable situation, so people make changes (Over the last 4 months, North America has stopped buying trucks and SUVs as commuter vehicles). Since what is sold at gas stations isn't really 'gas' but 'mobility', the price is actually different for every single purchaser: While the little 250cc bike at the pump is busy buying 200miles for $8, the contractor is buying 250 miles worth of towing 10,000lbs for $150 in his F350, and the middle-manager is paying $100 for 300 miles in his Sierra (while looking enviously at the bike, and hoping his wife finds a nice Civic for them to buy soon).
At any given time, most people can't just run out and buy a new vehicle today, or move tomorrow, or change jobs by Monday. In the weeks-months-years timeframe, people will respond to sustained high prices, and you will get a good idea of what they actually think gas is 'worth'.
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