No: it means that the supply of the commodity does not change much in response to changes in demand. With oil, it takes a long time to drill for the stuff, build pipelines, build refineries, etc. So if people want 10% more oil, it is hard to find that extra 10% in the short to medium term, so the price goes up by a lot more than 10%. Similarly, if demand drops a little, the price goes down a lot, if it’s a reasonably free market.
The ratio between changes in demand, supply and price are what people are referring to as “elasticity”. That’s a technical term that economists use to describe the ratios here.
Oil's Slide Deepens as Downturn Triggers Sharp Drop in Demand - WSJ Heres a WSJ article that says world demand is flat. That means has not gone down at all. Our drop has been eaten up by increases around the world. So there is no drop. Zero. WSJ is a pro business publication so I am not using a radical lefty source . So if demand drop is not in the equation ,then what variable is. SPECULATION
Notice I have not at any time said this isn’t caused in part or in whole by speculation. I don’t know - I am not an oil industry analyst.
But the bottom line is that you don’t know what the relevant elasticities are. Which means that you simply cannot say that a 10% drop in demand cannot lead to a 50% drop in price.
I just get a teensy bit annoyed when people make economic statements without any idea of the basic economics that underlies it.
Where would you see ANY change in consumption? Do you work in a gas station or on an energy trading desk?
Yes, it was speculation. Traders thought that demand would continue to increase and the market set the price accordingly. Turns out they speculated wrong.
Speculation is not a bad thing. Collusion and price fixing and other market distorting activities are bad.
So, earlier this year, people were expecting world demand to go up significantly this year, and that caused oil prices to go up. Now, principally because of the situation in the US, world demand is expected to be flat. Why on earth would oil prices stay up? Everything else being equal, you’d expect them to go back to previous price levels. While there doubtless are speculators, as there are in most markets, they don’t have unlimited control over the fundamentals of a market. Flat demand + flat supply = same prices. And that is exactly what has happened, from before the surge in oil prices to now.
My apartment building locks in heating oil contracts a year or so in advance in order to limit our exposure to oil price volatility. This usually saves us a lot of money.
Can you please let me know why this is such a bad thing? Thanks.
Oil is heading for $200 a barrel. Probably not in the next year or two, but certainly within 5-10. Consumption is rising. Not right now, of course, what with many developed economies being raped in the beard, but that’s a short-term perspective. In a more long-term view, consumption will certainly be higher than it has been in the past.
Oh yeah, I hate to break this to you - oil is running out.
Damn those those things called finite resources. Why do they have to be so…finite?!?
One main reason that the oil companies have not drilled up a lot of leases is there are insufficient drilling rigs, insufficient casing/wellbore hardware, insufficient capacity in the service companies and there are insufficient drilling engineers and Geology and geophysics people to manage the drilling.
So the price of oil is not really driving those decisions not to drill, rather the available people and equipment is better off used on more promising prospects.
That said you could argue that if you paid enough money , one could get the people and equipment but a price of 80 would not cover that cost, so yes the undrilled prospects are more trouble than they are worth.
What is interesting is the oil companies are right now wondering around to the service providers and dropping subtle hints about future activity, namely the service company pricing is set for 140 dollar oil, but oil is only 80 so future projects will likely be delayed/canceled until service company pricing and rig rates come down.
This is some what disingenuous as the price spike related contract prices cover a small percentage of the call out requirements and do not cover the long term service company and rig contracts etc, which were probably signed out for long periods of time based on a lower development price.
They do know that making noise about canceling drilling projects will get service companies to be worried and possibly drop prices. Unfortunately what the service companies will also do is cut capacity, and they can do it quickly. Unfortunately they can not ramp back up again quickly.
So if /when we see a continuation in the frenetic activity growth that has been taking place since '04 '05 (plenty of projects world wide are well worth drilling at 40 bucks) but a cut in service company capacity due to supply chain positioning, we could find ourselves back still in a position of capacity constrained growth.
This year it will cost you if the price drops. The point is not whether speculation is good or bad. We have not discussed that. The question was whether speculation is a component in the price. But, if big investors can move the market, they can control it. That suggests a very serious problem.
Isn’t a part of this speculatory crap that oil companies own insane amounts of leases on lands that they purchased for basically nothing and yet many of them are NOT abundant in oil, so therefore it isn’t worth their time to explore if they believe it isn’t there in quantity to do so?
Also, Ike shut down about 25% of our refining capacity, not to mention the shutting down of oil rigs in the Gulf, where we derive a lot of our own oil (hence the refineries being located in that vicinity, despite the hurricane threats)…doesn’t that matter? They are mostly back online now, right?
Shit, i am seeing $2.53/gal gas right now as the dropoff continues. I wonder if this dropoff in price has anything to do with the big bailout on Wall Street.
I am under no delusions that oil is suddenly cheap and all is well in the Kingdom again. But I do believe that we have underpayed for gasoline in this country for so long for a reason…and it’s because until the recent ramping up of the economies of places like China and India, we WalMarted the world oil market into gross amount purchases by buying so much that we got a discount.
That discount isn’t as relevant anymore, especially when coupled with the fact that oil is still pegged to the dollar, which is now quite a weak currency.
Ah, I don’t understand this shit…maybe someone smarter will come along and support/refute what’s happening.
This doesn’t make sense. If I am willing to pay a certain price for a good, and I pay that price and obtain the good, what have I lost? I’ve gotten what I wanted. The fact that I could have, in theory, gotten a better price had I rolled the dice and taken my chances isn’t relevant. I’ve purchased a good at what I feel is a fair price for me and I’ve mitigated my risk.
Of course speculation is a component in price; speculation alters demand. And of course, if you had enough money to buy up a significant portion of the oil in the market, you could manipulate the market. That’s why the commodities markets are regulated. For instance, back in July the CFTC charged Optiver Holding with oil price manipulation. To date, there’s been no evidence that anyone has successfully manipulated the crude oil market to any significant degree; they concluded that the manipulation by Optiver Holding did not have a substantial impact. But there’s nothing special about the oil market in this regard; all markets can be manipulated if you have enough resources to gain control of the supply. If you had enough money, you could buy up the beef in the US and manipulate the price of that. That’s why regulation is sometimes required in the first place.
Wild price swings do not necessarily imply price manipulation; they also indicate uncertainty in assigning value to a good. It’s hardly surprising that oil prices are fluctuating; markets all around the world are experiencing wild price gyrations due to uncertain economic conditions. The fact that for the first time in years world oil demand did not increase as usual just adds to the uncertainty.
Does a drop in the crude price per barrel actually cut out any marginal producers, any “barely worth pumping” wells out there? Or is the price of crude high enough that even, say, the few barrels of tar a day a 120-year old Pennsylvania well can produce still sells for 4-5 times the operating cost?
Yeah, I knew about that and sort of assumed that into my statement, but it’s a very good point nonetheless. It’s kind of like farmers deciding not to grow corn because they know it’s not going to be worth the equipment payments to do it, except that oil drillers/refiners can decide to not do it on a much shorter timetable (as opposed to the farmers growing season-long timeframe). Therefore, oil prices will not go down much farther, IMHO, and in fact, as someone mentioned upthread, that combined with increased demand due to winter heating, it will come back up. This is a significant portion of the equation. Blaming speculators is kind of like blaming consumers, in a way. They’re only doing what they have to just like everyone else. (Enron types notwithstanding).
I bought gas yesterday off of Southern for $2.69 a gallon…that’s nearly a dollar a gallon drop from what I recall of gas prices earlier in the year (I think gas peaked in my area in the high $3/gallon or low $4/gallon).
So…pretty significant difference. Of course, not all the stations here have gas at that price…I’ve seen a range from $2.80ish to $2.90ish in town. Even that price is significantly lower though than what it was at.
They do not want the land to drill. They want to have leases on their books ,which makes the corporation more valuable. Oil companies have 48 million acres of oil land rights to drill on. They will when they need to. Not drilling maintains a price structure. They control the supplies.
The argument that they do not have enough rigs is silly. They have made record profits quarter after quarter. They have billions in the bank. Buy the damn things. But if they do not ,it is not because they can not afford to. It is because they will drill when they are ready.
There are a lot of oil refineries all over the country. When the hurricane hit in New Orleans the price went up in Michigan. Our refineries were in tact.
Do you have a rig you want to sell? The companies are adding capacity, but it takes a while. Baker Hughs provides good rig count info for free, there are 318 more rigs turning in the US and Canada than there were a year ago at this time. You can’t build a rig overnight though.
Skilled workers are a very real issue. The United States turns out a handful of petroleum engineers a year. Texas A&M, the largest program in the country graduates about 40 people a year, and I would guess as many as half are international students who won’t be working in the United States. That’s why you can make 6 figures right out of undergrad. This is a big concern for the industry.