RK ARCHIVE - Energy Information Administration "Why Are Oil Prices So High?"

I generally agree with this analysis by my former colleagues, with a few caveats. First, I'd say it's not so much OPEC members' production decisions as their essential inability to increase output. I'm even more pessimistic about OPEC's "spare production capacity" than EIA, as I don't believe the Saudis really have any effective extra, beyond maybe 1-1.5 million barrels per day of heavy, sour crude that nobody really wants. Also, I don't really believe that "worldwide refining bottlenecks" explain the increase in crude prices; to the extent that refineries are having problems, that should REDUCE the demand for crude oil and thus the PRICE of crude oil. On the flip side, refinery problems would tend to INCREASE the price of refined products, like gasoline and heating oil. Finally, I'd throw in the declining value of the dollar as a factor, given that oil is priced in dollars.

Oh, by the way, did you all notice one "factor" NOT mentioned here? That's right, Iraq is NOT a significant factor in $90+ oil, given that the country is producing the same volume of oil it did in 2002, the year before the invasion. So much for that urban legend.

By the way, EIA's latest short-term outlook warns us to expect gasoline prices of $3.25 per gallon by next spring. And that assumes no oil supply disruption from, oh, let's just say Iran for argument's sake. In other words, it's time to start thinking about trading in the gas guzzler for a hybrid.

P.S. On the demand side of the equation, you think of Dubya had announced after 9/11 that he was setting the country on a crash course to get off of oil, we might have reduced demand a bit by now, over 6 years later? My guess is that demand would be several million barrels per day less, that OPEC spare production capacity would be several million barrels per day greater, and that oil prices would be half what they are now. But, of course, Dubya did his usual "heckuva job" on this one, too, and we're all suffering the consequences. But hey, the Saudis are happy!!! :)

Comments

Right, but one thing (Lowell - 11/13/2007 9:44:20 AM)

has essentially nothing to do with the other. Since Iraq is producing the same amount of oil as pre-war, the only possible impact could be psychological, although that certainly wouldn't account for a $60 per barrel price increase. Anyway, EIA is correct in its reasons listed above. In this case, I blame Bush for not putting the country on a rapid path to slash its oil consumption. Since this oil price increase has been fueled almost entirely by the DEMAND side, that's the side that needs to be addressed. But, of course, it hasn't been by the Bush Bozos.

Check out this graph (Lowell - 11/13/2007 9:53:26 AM)

Note that oil prices actually FELL in the immediate aftermath of the Iraq war, as markets were relieved that the oil fields escaped damage. Oil prices stayed around $30 per barrel until the end of 2003, at which point they started rising slowly. The big increase came after OPEC cut production three times and as demand in Asia and elsewhere continued to soar. There was also the oil supply disruption caused by Hurricane Katrina, as well as periodic disruptions in Nigeria and overall lower output from Venezuela due to Chavez's counterproductive policies. Finally, oil prices REALLY started shooting up in mid-2005, more than two years after the invasion of Iraq, as soaring demand continued to bump into a nearly vertical world supply curve. That's the fundamental problem we face, and there's no end in sight. Iraq has nothing to do with it, this is a long-term, systemic problem that combines two main factors: 1) surging oil demand in Asia and elsewhere; and 2) limits on both non-OPEC and OPEC supplies for a variety of reasons, none of which have anything to do with Iraq.

The dollar factor and wealth transfer (tx2vadem - 11/13/2007 10:08:32 AM)

I'm surprised that the value of the dollar did not show up in the EIA's list. The CEO of Exxon Mobil estimated that the weak dollar accounts for nearly $20 of the run up.

Also, what is not discussed as much is what a massive wealth transfer this is from industrialized nations to oil rich nations. And most of that oil wealth in those nations is accumulating in the hands of very few. I wonder what effect that will have in the near term and in the future.

The oil wealth is going to (Lowell - 11/13/2007 10:11:22 AM)

the most dictatorial, corrupt, repressive regimes in the world. Major beneficiaries of the oil price spike:

1. Vladimir Putin (Russia)
2. Mahmoud Ahmedinejad (Iran)
3. King Abdullah (Saudi Arabia)
4. Hugo Chavez (Venezuela)

Wonderful, huh? Oil truly is a "curse," or as one economist called it, "the devil's excrement."

Yep, people should stop driving (tx2vadem - 11/13/2007 10:27:06 AM)

Or, at least, carpool, slug, take a bus, ride the rail, bike, telecommute, or walk.

We could use the beneficiaries of oil to help campaign for conservation. You could have a ton of ads that play on the lack of conservation leads to helping terrorism or oppressing people somewhere in the world. And then when people do conserve, you get the added benefit of helping the environment.

OPEC is now making a huge windfall (Lowell - 11/13/2007 10:29:25 AM)

At least SOME of that money is getting siphoned off to support fundamentalist, anti-Christian, anti-Western "madrasas" around the world. A breeding ground for terrorists, paid for by our "oil addiction," as Bush calls it (but won't do anything to kick).

I'll see your P.S. and raise you one (Eric - 11/13/2007 10:59:27 AM)

Don't forget about Bush Sr. and his Iraq War / Kuwait Liberation. To put mildly, there were oil supply (and demand, price, etc) undertones to that entire effort. Had Bush the First read the writing on the wall and started our country in the right direction instead of spending big money/effort to return to the status quo, and had Clinton continued that effort (with the blessing of a Republican Congress), and had The Worst President Ever followed suit, we'd be way, WAY, beyond where we are today. To me, that's over 15 years that were pissed away in favor of Big Oil, Big Auto, and Friends.

Yeah, I know its a whole lot of fantasy... ahh, what could have been.

Why Free Trade is not Free (totallynext - 11/13/2007 11:25:18 AM)

In reality the increase in manufacturing in the Communist countries has drivin the demand for oil through the roof -

So while American's think they are saving a penny for that toy at Walmart they are paying twice as much in heating their homes and communiting to work because of the shrinkage of the supply of oil.

The difference between China and America in productivity is that when America operational cost increase (not labor) they continue to find ways to improve output to include cheaper and better ways to operate production systems. In China they don't they use antiquated product processes and since the government stipends its currency and production it does not care what the cost of oil is in the manufacturing process.

I think we really have to look at Walmart as being a communist run empire. They literally own the distribution channels in china, they demand the worst conditions and human trafficting to get their good cheaper.

When are we (you) going to stop shopping there?

Look on the Bright Side (Gordie - 11/13/2007 3:35:01 PM)

With gas at $3 a gallon and continuing to rise, maybe the American consumer with push Congress and Congress will get off their butts and start enacting decent legislation to make us energy independant.
Remove some of the tax cuts and benefits from the big oil companies who are not paying their fair share towards research to get us off foriegn oil and the car manufactures making faster progress then they have been.
Personnally if the car manufactors had a good enough incentive we might see 100 MPG cars, instead of so many low MPG cars, between 35 and 60. Very few reach 60 MPG. They should be getting allot more.

Take a closer look at China (JScott - 11/13/2007 5:46:28 PM)

While we at home have to face up to the "we are on life support" in terms of the environmental impacts our industry and consumers contribute to climate change, who is really going to address Chinas? Does anyone really want to know what a gallon a gas really costs in China?
The comment regarding free trade is right on and anyone who has ever been to China can see that though China may buy all accounts be an its infancy it terms of job creation, it must employ all those people out away from the cities to keep them from coing into the major cities where population is already too dense. They are doing this by building coal, yes Lowell, coal furnaces very similar to ours at a tremondouis pace in order to power its manufacturing industry and put people to work. China is becoming a huge player in the demand for oil and much of the worlds "growth" that has come from the free trade deals has been a boom for China. China today does not seem to be as concerned with the environment and is not waiting for nerw technologies, they are putting the people to work now and building up a very formible economy while buying up our debt with the profits.
Talking about no level playing field, China is the biggest culprit and we continue to let them get away with it.