Wednesday, March 21, 2012

Supply, Demand,, Oil Speculators & An AP Hit Piece

The left is at it again, blaming oil commodity traders for the rising price of gasoline while studiously ignoring their own refusal to allow greater production of domestic oil. If you believe them, supply of oil is not the issue, just those evil speculators.

Let's ask this, do you know what the spot price was for South Carolina Intermediate Water at the close of business on NASDQ today?

There isn't one of course. Water is not traded on NASDQ, yet it is far more important to us than oil. It is necessary to sustain life. We consume exponentially more water than we do oil or gas. But because supply of water is so abundant relative to demand, it is not traded as a commodity, it is not subject to the vicissitudes of speculation in a very tight market, the cost of water in SC does not rise or fall depending on wether Iran throws a temper tantrum, and water's cost per gallon is negligible.

The moral of the story is obvious - sufficiently increase supply relative to demand, and the cost of any commodity will fall. That is the immutable law of supply and demand.

Today, we are only drilling oil in fields estimated to provide us with 22 billion barrels of oil. But what if our government opened up to drilling fields containing ten times that amount, 220,000 billion barrels of oil starting tomorrow. That is certainly within the realm of reason. Our estimated total reserves according to Obama's Department of Energy, likely exceed 3.5 trillion barrels of oil. We could easily ramp up production to the point of eclipsing Saudi Arabia as the world's largest oil producer. Indeed, we could dwarf all of OPEC. And when the daily supply of oil on the market increases markedly, what then happens to the price? Indeed, who would be willing to speculate on increasing oil prices in a saturated market with more than enough supply to meet the world's demand.

The "evil speculators" meme coming from the left is the same one the left used during the 2008 oil price explosion, when oil reached a record of $145 a barrel. By comparison, today's price is approximately $107 a barrel. The left used the meme as a red herring to cover their refusal to drill for our domestic oil. The left's 2008 complaints caused the Commodities Futures Trading Exchange and other international agencies to launch an investigation. The ultimate finding - the cause of the price spikes was not speculators, but rather that "the world economy had expanded at its fastest pace in decades, resulting in substantial increases in the demand for oil, while the oil production grew sluggishly, compounded by production shortfalls in oil-exporting countries." Supply and demand. Go figure.

The "evil speculator" meme is also a dangerous one. Commodity trading serves the purpose of insuring both producers and commercial purchasers that they will have a guaranteed contract at a set price for future production. Over regulate that and you interfere with the market - something that always comes with bad consequences. This is particularly problematic when one realizes that it is supply relative to demand that is by far the most important component of oil cost.

Update: Since writing this, I see the AP has written possibly the most deceptive piece I have ever seen. According to the AP:


It's the political cure-all for high gas prices: Drill here, drill now. But more U.S. drilling has not changed how deeply the gas pump drills into your wallet, math and history show.

A statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production by The Associated Press shows no statistical correlation between how much oil comes out of U.S. wells and the price at the pump.

If more domestic oil drilling worked as politicians say, you'd now be paying about $2 a gallon for gasoline. Instead, you're paying the highest prices ever for March.

Political rhetoric about the blame over gas prices and the power to change them — whether Republican claims now or Democrats' charges four years ago — is not supported by cold, hard figures. And that's especially true about oil drilling in the U.S. More oil production in the United States does not mean consistently lower prices at the pump. . . .

. . . American oil production is about 11 percent of the world's output, so even if the U.S. were to increase its oil production by 50 percent — that is more than drilling in the Arctic, increased public-lands and offshore drilling, and the Canadian pipeline would provide — it would at most cut gas prices by 10 percent.

What a steaming pile of bull excreta that is. As Just One Minute points out:

Oh, for heaven's sake - the quetion is, does additional US production result in lower prices than would have otherwise prevailed? If, just to seize an example, producers only ramp up US production in response to shortages and rising prices elsewhere, a simple statistical analysis such as done here will "prove" that more production is always associated with higher prices.

Actually, it goes beyond even that. U.S. production has been in decline during virtually all of the past 36 years, while world demand has been steadily rising, thus making it impossible for the AP statistical analysis to have any validity. (The following numbers are given in thousands of barrels per day.) According to U.S. Energy Information Administration figures for U.S. field oil production**:

- In 1970, we were pumping 9,637 barrels of oil per day. U.S. oil production since then has STEADILY DECREASED while world demand has STEADILY INCREASED.

- In 1980, the number of barrels per day produced by the U.S. had declined to 8,597.
World demand in 1980 was 59,901.24 barrels per day.

- By 1990 U.S production had decreased to 7,355 barrels per day.
World demand had increased to 64,273.

- By 2000, U.S. production was down to 5,822.
World demand had increased to 76,963.

- In 2011, U.S. production was 5,673.
In 2011, world oil demand hit a new record of 87,400 barrels per day.

So when, over the past 36 years, has the U.S. increased its oil production so as to impact an ever increasing world demand, thus bringing down domestic gas prices? We are producing exponentially less oil today than we were in 1970, while world demand has exploded by nearly a third.

The AP article is a ludicrous agenda driven hit piece with no discernible basis in reality. THey have waterboarded statistics to tell a wholly false narrative. Indeed, even their basic premise is false. The AP compares U.S. oil production to U.S. gas prices, but that wholly mistakes the issue. There never will be a direct correlation between U.S. production and U.S. gas prices. The correlation that exists is between global production of oil - of which the U.S. has been an ever shrinking bit player - and global demand - exploding in India and China particularly over the past decade - that have been the main driver of prices. The plain truth is that we have the capability to expand oil production on a massive scale, sufficient to effect price. And I am sorry to all the lefties out there, including Obama and the AP, but they just can't repeal supply and demand.

**Note, the way the information at EIA at presented, I am unsure whether the "field oil" numbers also include our offshore oil production numbers. The offshore production numbers, in thousands of barrels of oil per day, stood relatively stable at 1,000 from 1980 to 1990, then jumped to approximately 2,000 barrels per day in 2000, where it has more or less remained since. Those numbers would cause a bit of an uptick in oil production during the period 1990 to 2000, but would still be exponentially lower than the relative increase in world demand during that same time frame. Thus it does not alter my criticism of the AP hit piece.

1 comment:

billm99uk said...

But because supply of water is so abundant relative to demand, it is not traded as a commodity, it is not subject to the vicissitudes of speculation in a very tight market, the cost of water in SC does not rise or fall depending on wether Iran throws a temper tantrum, and water's cost per gallon is negligible.

Hey, speak for yourself matey, here in Britain we've got a massive drought and a hosepipe ban is in effect for farmers and gardeners as it hasn't rained significantly this spring. Well, I say Britain, but where I live in Wales, we've had plenty of rain (we're like the Seattle of the UK!) but no way of exporting the stuff. Which is unfortunate as it would make a great contribution to our trading position, which is mostly based on sheep (and rugby!).

Say, I've got an idea! If Obama isn't going to be using that Keystone pipeline thingy could you sell it to us at a knock down rate? It'd come in really useful...