Friday, April 22, 2005

Oil Price Conundrum

With all the oil-related news and speculation of late, an interesting conundrum about oil pricing has come up in several places--except, of course, for the main stream media. The MSM has been telling us for months now that rising oil prices are primarily a factor of refineries running at 98% capacity, and of seasonal demand issues or depleted stockpiles. That makes sense on the surface, but dig deeper:

Oil refineries process crude oil--and they process at a very constant rate all year long. That's why they have all those tank farms to store their excess from off-season production of refined products to sell in the high-season (Summer travel and Winter heating). So Refinery production does not fluctuate in response to gasoline demand, or seasonal temperatures or low gasoline stockpiles. In fact, this is economics 101: if refinery production decreases, and the supply of crude oil being pumped out of the ground remains steady (as it has for the past several months), then price should actually DROP.

Clearly, with crude oil prices over double their 2004 average at the moment, the price hasn't been dropping. So... if refinery capacity is holding steady, and the price is risinig, what is the cause? Easy: supply is dropping. Less crude is being pumped out of the ground, despite OPEC raising or eliminating all production quotas, and the existence of a huge profit-motive (with the high prices) for oil producers to pump as much as humanly possible.

It's Econ101. Maybe we should send our journalists back to school.

Question of the year: Is April 22, 2005 the date of the Global Oil Peak?



Ghawar field, the world's largest "Super-Field", producing roughly 5 million barrels of light, sweet crude every day, and key to the Saudi's plan to raise production from 10 MB/D to 12.5 MB/D by 2009. Or so the Saudis would have us believe. I'm guessing their rapidly growing, largely impovershed population would not continue to tolerate the House of Saud if they found out that their oil-financed handouts were smoke & mirros...

5 comments:

Jeff Vail said...

Department of Energy data on oil refinery capacity, inputs and outputs can be found here:

http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/wpsrall.pdf

Nice graph on page 3. Note that total crude oil inputs in March '04 were 14.802 million barrels per day. Total crude oil inputs in March '05 are forecasted to be 15.171 MB/D. That's a 2.5% increase year-on-year. But notice that in May/June/July/Aug of '04 the inputs (hence crude demand) were actually slightly higher than they are a present. In both periods the price of a barrel of crude was roughly half what it is now. A 100% increase in the price-equillibrium cannot be explained by "demand" if the demand for crude isn't increasing while the price is...

Anonymous said...

I see your point.

May be 2 solutions :
A/ Supply has decreased
B/ China is thirsty (strategic reserve under way)

qibu.

troutsky said...

The cartel is solid,Latin American producers are not undercutting, everyone is making tremendous profits, why, except under threat of military intervention, would any producer lower prices? The price is determined by men sitting around a table deciding how far they can push the global economy.

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