Posted: 5/30/2008 10:35:09 PM EDT
| One of the reasons cited for oil and therefore gas prices being so expensive lately is increased demand. My question is, if demand is still being met, why are prices so much higher? Is it mostly because of a lack of refining capacity? Are oil companies having to higher on more people, and therefore having to pour more of their revenue back into extraction? |
| Cuba can give contracts to the Chinese to drill for oil 60 miles off the coast of FL yet Federal law forbids any drilling by US oil companies with 150 miles of our shores. The easiest places to drill for oil are off limits in our country. The oil companies will only drill where it is cost effective for them to extract oil. Drill here, drill now, pay less! |
That still doesn't answer my question, if demand is still being met, why are prices so high? It may seem like a stupid question, but I really don't have an answer. |
When demand outstrips supply, higher prices are the reason demand can still be met. Think of price as an equilibrium point, the balance between supply and demand. If you want to make sure you get that full tank of gas, you will pay for it, especially if you know there are other people behind you willing to pay the same or more. If demand rose, supplies stayed put, but prices were commanded to stay put, we would see shortages and gas lines like in the 1970's, because that's what the stupid government actually did back then,
It's mostly rising demand because huge nations like India and China are demanding more energy as their economies have abandoned socialism/command economies and embraced free market international trade, and the worldwide supply wasn't prepared for that. The value of the dollar against foreign currencies has recently crashed, making the situation even more costly to Americans. The oil market is priced in dollars, but producers are finding that rater than hold a declining asset like a dollar, they'd rather hold an appreciating asset like a barrel of oil under their soil. China has its dollar reserves from trade with America, the Saudis have their oil reserves they got from being lucky sperm. |
First, you must realize that exploration, production, refining, transporting and retailing are for the most part, seperate entities in the supply chain. When supply is tight and crude price rises, only those pulling it out of the ground profit...somewhat. Here in the States, the landowner profits most. The production company second but once it is sold to the refinery, there is no additional benefit in profit. Now the refinery COULD use a poorer grade of crude, say heavy Mayan, instead of a medium like West Texas Intermediate, because the Mayan is $15 a barrel cheaper. But in this trade-off, there are 5 less gallons of diesel/kero/gasoline from that barrel, reducing profits. And there are 5 gallons more asphalt. With asphalt at about $80 a ton in some places, it might make sense BUT with a crimped rail system AND expensive trucking, the value of asphalt is more like $50 a ton and so the refiners place a greater demand for the higher grade crudes. Note, not all refineries have such flexibility so they are forced to use higher grade crudes. But the general pool of crude includes all grades. And finally, because we have built our nation with a heavy reliance on petroleum, the demand is highly inelastic. Slight shortages lead to large price escalations. |
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High prices ensure availability. If prices were fixed, demand could not be met. There are a lot of people (worldwide) who want a finite resource. If there is to be enough to go around (without rationing), prices must increase. The higher prices reduce demand, ensuring availability. |
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Demand plays a role in pricing, however what the market will bare plays a bigger role. There is no magic formula or law that says the margin on fuel will only be this much. It is capitalism. It is what people are willing to pay. If current production levels stay the same and current demand is being met, fuel prices won't decline until demand does. Quite frankly everyone in the US could ride horses and with the increased demand for crude in China and India, I don't think it would make much difference. Yes, I think we're cutting back but the rest of the world is picking up. In the meantime, the oil companies are going to be raking the money in. Let's just hope its put back into the companies some in the form of oil exploration and crude production. In my fathers lifetime, we were an oil exporter. We have forced the US petroleum industry into the world market though environmental laws and lack of government support against unfair trade practices, OPEC 1983 oil crash. Simply put, its just as profitable to sell to China as to us and the name of their game and everyones in business is profit. There's a lot the government can do to ease the rising fuel costs, however it isn't heavy handed taxing but incentives for crude production by opening up domestic fields, however we are on a crash course of save the planet by ourselves while the world is not doing the same things. Tj |
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I would much prefer gas at $4.00, and be able to buy all I want, without rationing, waiting in lines, limits on amount of purchase, than to have a government mandated price of $2.50 and not be able to find any to buy. The market is self regulating. A higher price will cause people to limit the amount they buy, and how they use it. And it will insure a supply. What do you think would happen to fuel usage if it were to suddenly be much cheaper, and there would be a huge supply? Usage would go up. It's basic Economics. Of the OP's question, demand is being met precisely due to the higher prices. |
Yep.....roughly 75% of the price at the pump is crude costs. 5sub |
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Demand is not being met. Last week during an interview T.Boone Pickens, a man who got rich in oil stated that current daily demand is about 86.4 million barrels a day. Current daily production is about 85 million barrels a day. That ratio will continue to drive prices up. If the ratio changes and demand increases more than production prices will rise even faster. If the ratio goes the other way prices may drop. There are other factors in play also such as refinery capacity etc. Political stability in oil producing regions is a factor also. Someone blows up a pipeline in Nigeria which is a very unstable country politically and it will have an immediate and profound effect. The basic underlying mechanism is supply and demand. Prices react to that equation. When prices are held down artifically like the Chinese are doing it plays hell with the system for everyone else in the game. Lots of variables and factors are involved but the basic numbers of how much do we pull from the ground every day versus how much we use every day is the key factor in oil prices. |
I saw that on Glen Beck also. |
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a small change in the supply/demand balance can have a huge impact on prices, because it is a commodity which is necessary for an economy to survive. It's like being in an airplane which is going down, and there are six passengers and only five parachutes. How much is the last parachute worth? Potentially a huge amount of money, whatever the highest bidder can pay, because it is necessary for survival. |
| i work for a company that has most of the major export/production pipeline work in the gulf of mexico and we have been very slow in terms of work in this area. the new platform building in the gulf has definitely slowed down and this could have a great effect on oil prices in the US. B.P. Thunderhorse, which is the largest oil platform ever built in the gulf, is supposed to kick off in production sometime this month which should stabilize oil prices slightly. but then again dont expect much....we are talking about corporate greed here too! it makes me sick that even us that go get the oil cant even get a break on gas prices! |
Slowdown is due to the lack of leasing with the problems of Thunderhorse which delayed first oil by nearly 4 years. Deep water technology will be advancing rapidly as soon as there are suitable leases to apply this technology. |
i agree on that one Keith. i just hope that technology catches up soon, i'm getting tired of salvaging these lost "katrina" platforms that are at the bottom of the gulf floor. I'm just dying to go pull another pipeline in to a new oil platform! prettty exciting shit.
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Pulling pipe? Hope you like the deep. Katrina platforms? Those are small stripper operations. TH, when fully characterized, was at 250,000 BPD for 20 years, Amoco's Atlantis isn't much smaller at 200,000+ BPD. With the high demand in the Gulf Coast area, most of that is domestic. Now if FL can be surveyed. Before the Cubans get it.. |