With the upswing in gasoline prices I’ve heard the main cause of it being demand outweighing supply.
I’ve also heard that it’s not a shortage of crude but the refineries not being able to keep up with the demand.
There was also a story ran today saying the big oil companies have such record profits that they have run out of things to spend their money on so they are giving huge dividends to share holders.
So why have they not built any new refineries in the past decade with this surplus of cash they have?
I understood that the price increase is due to international oil prices. The domestic companies do seem to be making a heck of a lot of profit, though.
They didn’t have a surplus of cash in the last decade.
Oil prices were very low. Paul Krugman recently quoted a 1999 article from The Economist magazine forecasting a change in oil prices. They were then $10 a barrel and the magazine predicted it would sink to $5.
The run-up in oil prices has occurred relatively recently. Other periods of rising prices were short-lived and the oil companies were badly burned by sinking money into refineries back in the 1970s when the first oil price boom scared everybody, before the prices sank back into nothingness. And every idiot American started insisting on larger cars and bigger engines.
There’s no question that now is the time to start building new refineries. But that’s a process almost as long and difficult as building a new nuclear power plant, so don’t expect to see anything happen for another decade.
Making more cheap oil available quickly is exactly the wrong way to proceed, in any case. Conservation’s effects can be seen immediately and very cheaply. Doesn’t matter. I don’t expect to see that either.
I think this: http://www.arizonacleanfuels.com/about.htm
finally is a “go.”
I find it hard to believe that less than ten years ago oil was hovering around $10. Not hard-to-believe as in calling for a cite, but hard-to-believe in an intuitive/emotional sense. The rational side of me wanted to see oil prices over time graphed out in order to smack the emotional bit into sense, and quickly found this. It’s a graph from WTRG that shows oil prices from the late forties until today, annotated with a few historical occurrences (e.g., Iranian Revolution).
What happened? Is there any serious talk/analysis that prices will eventually fall to near-90s levels (albeit adjusted for inflation, etc.)? Aside from geopolitical shenanigans (e.g., wars and whatnot), has there been an even remotely similar upturn in consumption? Decrease in available stocks? Is there an oil bubble? Is a valid answer to all this Nobel prize-winning?
What happened? India and China. Even as few as ten years ago, their economies used so little oil that it didn’t make a dent in the world market. As long as total world demand was less than total world supply (which is really supply at the rate that OPEC wants to pump it and refineries can handle it) then prices will remain low.
World demand today has grown. How much doesn’t really matter except to say that the slack has disappeared. If demand is even slightly higher than supply (or, in the real world, a few percent lower: something always is going wrong so that supply is affected) prices will go up. Keep doing that for several years and you see why every forecast is now for $200 a barrel oil.
World demand will continue to zoom upward. India has 25 cars per 1000 people. The U.S. has 805. Tata is planning on selling $2000 cars in India. What happens if India reaches even 100 cars per 1000? (China is also at 25. That will also increase multiple times.) That’s just one tiny indicator of the surge in consumption in every growing economy. (Economies growing from near-nothingness include most of eastern Europe, much of the Middle East, and many other places in Asia.) Consumption continues to grow in mature economies as well. Africa may stop being a basket case someday.
And supplies? OPEC doesn’t plan to increase production. From their point of view, why should they? They love higher prices.
I don’t get it. Supply and demand are basic concepts, but the American public doesn’t seem to realize that they exist and are always stunned when they affect their world. Start learning, folks. You’re going to see this happening on dozens of other commodities over the next few decades.
If you look at this chart from the Department of Energy, you’ll see that it’s not just the U.S.
In 1970, the U.S. accounted for a little more than 25% of the world’s refining capacity. In 2006, the U.S. accounted for more than half of the world capacity.
So the real question is “Why no new refineries anywhere?”
This NPR story from last year gives us a little insight into what the refiners are thinking
(Westfall is the chief economist for the refining company Tesero.)
Even for an oil company, a billion dollars to upgrade one refinery from 100,000 barrels per day by 20 percent seems like a lot of money.
The company says it made $566 million in net earnings in 2007.
Another factor is the whole peak oil issue. Oil companies, which have accurate information on how much oil is available, are reluctant to make long-term investments in expanding oil refinery capacity. The amount of oil that can be refined is obviously dependant on the amount of oil that can be produced. It’s likely that before any new refineries could pay off their investment, oil production will have diminished below the capacity of the current refineries.
Hard to say if peak oil will be a real issue.
This graph is as good as I’ve seen for the short term on the subject.
Some of the trend lines continue to point upward, probably taking into account oil shales and other reserves that are now reasonably priced for recovery. Reading the fine print, those upward lines do come from CERA, which does take “unconventional” sources like shale and tar sands into account, unlike most of the others. This is the big fudge factor in the whole peak oil scenario. If we can really get these other sources into full-blown production, peak oil falls apart.
Even the ones that call for a peak don’t begin to turn down until about 2010. Remember, Hubbard’s original prediction called for the peak to be hit before the end of the century, and that year keeps getting pushed off. If you assume a drop to a mere 50 mbpd, which was the value from around 1970-1980, the majority of trend lines don’t return to that number until after 2030.
If that’s correct, then some investment in refinery capacity is still needed. We have a lot of rapidly aging plants which are continually being tweaked to increase production, but they can’t all last another 20-30 years.
OTOH, it’s possible OPEC believes in peak oil, knows its money supply will be cut drastically in a relatively short time, and is gouging the world for all it’s worth in the short term. If OPEC believes this, it’s hard to imagine the big oil companies haven’t picked up on it.
Huge number of ifs. Nobody knows. Betting billions is always hard for a company to do. At least, betting billions on capital projects is hard to do. Betting billions on bad mergers and risky investments they’re always up for.
The Alternative Fuels Issue also affects whether or not oil companies want to make that 20+ year investment. With electric and hydrogen, ethanol and biodiesel, fuel cells and the whole all being worked on, it is something of a minor gamble that more refineries will be needed. As Exapno Mapcase says, it’s a long and arduous process to build a new refinery. It’s also severely impacted by NIMBY and a large crowd of people who will claim that it isn’t necessary, or that we shouldn’t be building it at all (inspite of all real world logic).
Just to make it explicit, as no-one seems to have said this outright yet. They’ve built no new refineries in the US because there’s been no need to - expanding the existing refineries has done just fine, is cheaper and quicker, and needs less regulatory approval. The chart kunilou linked to shows US refining capacity grew 50% since 1970 (although where the proportions quoted came from I’m not sure - that chart shows the US had 25% of the world’s refining capacity in 1970 and decreased to 20% in 2006).
While oil companies’ profits have gone up, their profit margins may not have - remember they are the ones now paying $135 for a barrel that cost $10 less than a decade ago.
My mistake, I transposed two columns when I was looking at the results. Even with my mistake, I agree with Askance. Expanding existing refining capacity is hard enough. Building new refineries is harder.
Price is due to speculation. Most experts think the supply and demand would result in 50 to 55 dollars a barrel. But speculators thinking the price will rise are buying future markets ,
So people are purchasing a product they will not receive from someone who never had it and prices go up. The difference between the real price of oil and the price driven up by financial markets has resulted in some people making billions of dollars on oil without doing any work. Strange world we live in.
Some people are attributing this to speculators, true. From what I’ve read, though, the majority of economists say that this is a real, long-term rise and not an artificial bump. There certainly are some speculators taking advantage of the situation, but if you took them out of the equation very little would change.
You act like it is a one way street where traders are simply making a lot of money because the price has been driven artificially high. Logically there is someone on the other end of each trade who has lost money (also a trader). In fact, the one large speculative oil and gas trade I remember ended up resulting in a $6.5 billion loss for the company that did it (Amaranth).
Also, I would be interested in finding out the breakdown in derivative trading between speculators and hedgers. I don’t have any information handy, but I would imagine that a very high percentage is not pure speculation. I would guess that most is done by producers and consumers in order to lock in a future price in order to protect their margins.
Shouldn’t the rising tide eventually lift all boats? $20/gal gasoline is fine if the median per capita income in the U.S. rises to $150-200K.
I’m hoping this is a joke or sarcasm. But since you left off the smilie*, it’s worth taking a look at.
So, what rising tide? Real median income spent most of the 2000s going down before finally rising. It’s at $48,000 for 2006, the last year I could find. So if gas goes from $4 to $20 a gallon, real median income would have to rise from $48,000 to around $250,000 to compensate. Those folks at $150-200K are still losing.
And of course in reality no 500% increase in real income (i.e., not consdering inflation) is going to happen.
*You can always find people on the internet who will say something like this and mean it. You can find several someones here at the Dope I can think of. I don’t consider you one off the top of my head, but I’m bad at remembering names. 
I wasn’t being completely sarcastic – I am not particularly knowledgeable on the topic. I was thinking that high oil prices would, after a long chain of dominos had fallen, lead to increased wages in the workplace.
Don’t wages usually rise in response to rises in cost of living (I mean in the overall marketplace of labor, not at particular jobs that feature regular cost-of-living increases)?
Hang on now – I am very much thinking of inflation. ISTM that rising oil prices is just a localized bout of inflation that should eventually percolate it’s way through the (global) economy as a whole.
There is sort of a domino effect, but it’s more like one of those super-fancy domino protraits that take five days to set up and two minutes to completely fall.
What will happen (it’s already starting to happen) is that both employees and businesses will first try to just absorb the increased cost, then cut back in other areas to make up for it.
Then businesses will finally be forced to raise prices. Employees will ask for wage increases to cover their higher expenses. If the economy were chugging along nicely, this could happen without much overall damage.
But the economy isn’t chugging along nicely; at best it’s going in stops and jumps. Businesses will have a lot of catching up to do, then employees will have a lot of catching up to do. Prices will jump, then wages will jump in an attempt to keep up, then businesses will have to increase prices more to make up for the higher wages, employees will ask for more wage increases to make up for lost buying power, etc.
What happens in the end is that you have businesses charging higher prices than anyone wants to pay, and employees asking for higher wages than anyone wants to pay. This is the classic formula for an inflation-driven depression.
EXCEPT if the price of a basic input (energy) doesn’t come down in the price/wage collapse, then the baseline of costs may wind up too high to sustain the current business model.
This is what’s happening in the airline industry right now. People who are willing to spend $99 for a discount ticket may not be willing to spend $199 for the same ticket, choosing to drive instead, or just stay home. Then you have businesses collapsing, which raises unemployment and lowers the prevailing wage, without a corresponding reduction in costs.
It’s true that if everything were to rise at exactly the same rate then it wouldn’t matter what the cost is in current dollars.
That’s why I emphasized real income. Real income is not going up much at all. For many people real income has stayed the same if not dropped since the 1980s. Gas prices, however, truly have increased in real dollars. The discrepancy is larger and getting larger every day. Check out figure 4 on this page. Except for the huge spike from the gas crisis in the late 1970s, real gas prices have been sinking since the Depression. From 1986 to 1997, the price of a gallon of gas in today’s money was only a little over $1.00. Now it’s hitting $4.00 and will probably go higher. Has your income actually gone up 400% since 1990? (And again, remember that we’re taking inflation entirely out of the equation.)
Wages never rise because of the cost of living. They rise in real terms because of greater productivity or greater demand. The country has kept more or even as a whole because of gains in productivity and efficiency. However, the hubbub about high-paying factory jobs being lost and being replaced by low-paying service jobs is not just a story the media plays up. Even for those who have managed to keep their jobs, wage increases have barely paced the rise in inflation each year.
That one graph I linked to says everything about why these gas prices are going to hurt the economy so drastically. Two dollar gas, even three dollar gas, is the norm by historic levels. However, we were recently spoiled by the fantastic run of gas prices that were at an all time low. We adjusted our living - size of cars, length of commute, patterns of shopping - to extremely cheap gas. Today gas is way above the highest prices we’ve ever seen. That page says crude oil averaged $68/barrel in 2007. It’s amost twice that today. That’s got to hit every aspect of our lives.
Wages will not go up to match the rise in gas. There are huge arguments among economists over whether the official inflation rate is underestimating the rise in costs. I come down on the side that says it is. That’s not going to matter. The official inflation rate is tiny. Even if the real rate is 10%, how likely is your boss to give you a 10% raise this year just because prices go up? Then ask yourself how likely it is for your boss to quadruple your paycheck.
Economists hate inflation because high inflation destroys economies. The Fed has been doing everything possible for years to keep the inflation rate as low as possible. The rise in gas and food prices will show up eventually, but they’ll take a bigger bite out of your paycheck because your wages won’t be going up at the same rate. You have to take inflation out of the equation to understand the effects of this gas price crisis. Once you do its magnitude becomes clear.