Monday, June 20, 2005

"Refinery Capacity" & Crude Oil Prices

Iran's OPEC minister is saying the exact same thing that we hear from Bush & the Saudis: "The fundamental problems with the conditions of the [crude oil] market are related to refinery capacity".


If refinery capacity is tight (as they claim, and facts seem to support, especially the capacity to refine the necessary grades of crude), then refineries limit orders of crude from the producers (why would they order crude [demand] that they know they can't refine?)--steadying or decreasing demand. If demand is level or dropping, then prices should HOLD or DROP unless supply is also dropping.

If refinery capacity is not tight, then the issue isn't refinery capacity, but rather DEMAND for crude oil. Demand rises, supply remains steady and prices should rise, as we're seeing.

The final possibility is that the price is reflecting the information processing capability of "the market" to identify future problems before they are readily apparent. Refineries take a very long time to build, and there aren't significant refineries under construction at the moment, so this mysterious future market signal is not about refinery capacity. Therefore it is most likely about the future increase in the disparity between supply and demand -- either from a decrease in supply or an ongoing increase in demand.

This is the smokescreen that is being laid all around us: Those in control of oil, and those whose power depends on the continuation of cheap oil cannot let us in on their secret: WE DO NOT HAVE ENOUGH SUPPLY of crude oil. It doesn't matter if supply grows--demand is growing faster. And there are solid indicators that supply will decrease in the near future.

With NYMEX crude closing at a record high on Friday, the real question becomes this: how much longer can prices increase before the general public applies the simple economic logic used above to understand that there is a serious problem, and that their leaders are lying to them??

The proof is in the pudding: NYMEX Crude Futures for December 2009 have risen to $55.55/barrel. OPEC has also increased their target price from "$22-28/barrel" to "$48/barrel". Fat chance. (link to NYMEX chart, free registration required)

The only economic discussion of any actual value at this point is just how fast price will continue to rise as an inelastic demand for petroleum is confronted with insufficient--even decreasing--supplies?


Sal said...

The business press is a lot more useful than the popular press on this topic, but much soothing rhetoric still abounds. BW, for example, does inform about the fundamental change from supply to demand pricing, stating, "Traditionally, oil markets have been driven by changes in supply rather than demand. The recent two years or so of high prices have resulted from big increases in demand." This could be an early indication of the peak or at least foreshadowing.

Jeff Vail said...

Here's the latest from BBC News:

"Traders also said that problems at a couple of US refineries - including a problem at a Shell plant in California - might have contributed to the latest spike in crude prices."

Is this concept really that complicated??? Seriously...

requiem_netau said...
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requiem_netau said...

The prices are rising because of OPEC nations are controlling output. They know that the oil fields of Iraq have been secured, that the pipeline has been built through Afghanistan and that oil prices will ultimately become lower as a result of increased American control/stability. The fear losing production sway like they did in 1982. Whether they are trying to illustrate they can still exert control or are just getting greedy before that happens, I'm not sure.

Jeff Vail said...

I disagree, at least in part: while I do think that OPEC is milking the situation, I don't think that they have much, if any, spare capacity. The recent quota increases have been just lip service to the profit-driven production already in effect. The real problem here, though, is that we really don't know what's happening. As Matt Simmons points out in "Twilight in the Desert", there is no data transparency when it comes to OPEC, and especially Saudi Arabia.

Just purely a huch, but I think that crude will top $100 by Christmas. Maybe we can all laugh about my prediction over eggnog. Then again, I don't think that the so-called "peak oil" phenomenon will be a bad thing: read "Logic of Collapse"...