Why dosen't the price of gas drop?


#1

Even the industry admits that supplies are up.What happened to the law of supply and demand?It’s beginning to look like the electrical energy crisis of '00 . Remember ENRON.


#2

Supplies are UP? You must read different newspapers than I do. If you are referring to that huge new oil field discovered last year in the Atlantic Ocean by Petrobras, that field will most likely take a decade before it can be tapped.

Other recent crude oil discoveries, though much smaller than the Petrobras discovery, will also take years to exploit. If you are referring to the occasional increase in production announced by OPEC, surely you have noticed that these increases in production are relatively small and are followed within a month or two by cutbacks to the previous level of production.

In terms of supply and demand, the biggest factor is the vastly increased demand for gasoline over the past few years in the booming nations of China, India, Indonesia, etc. Even if the supply of crude oil was increasing (which it is not), the demand for petroleum products in those countries is increasing at a very rapid rate.

If you want a clue about the booming nature of the Chinese economy, the biggest market for new Rolls-Royce automobiles is now China. And, for every Chinese businessman who can afford one of those land yachts, each year there are several thousand small entrepreneurs who are now making enough money to buy their first car.

So, yes, it is supply and demand that is the problem. And unless someone can figure out how to stop the increasing demand, we do have a problem with supply, and that problem will continue to drive prices in a direction that we do not like.


#3

Even if supplies were up, what incentive do they have to reduce prices? It’s not like they have any trouble selling the gas they do have. Why would you have a sale on something that is in good demand and you’re nicely profitable as it is? Have you ever noticed that the price rise time is like nanoseconds and the fall time is measured in weeks? That’s pure profit on the backside baby.


#4

I don’t think there is any significant increase of crude supplies. Demand has shown a very very small decline however. What you need to consider is the refinery capacity. The oil companies do schedule maintenance shutdowns to best maximize profits.

Frankly if you want to see a real decrease, reduce demand. That means smaller and more fuel efficient cars. (Note: don’t assume that hybrid or bio-uel cars are more fuel efficient) increased used of public transit and reduced use. Do you really need to drive when you can walk or maybe combine a trip?


#5

Joseph–Regarding your statement, “Demand has shown a very very small decline however”, that is true regarding the US, where gasoline sales have declined somewhat over the past few months. That is undoubtedly the result of the bad economic conditions in this country, coupled with the price increases for gasoline.

After all, if one is unemployed, that person is driving less and also has a greatly diminished ability to pay for gasoline. Even if one is employed, the rapidly increasing price of food, as well as gas, is causing a lot of people to rethink whether that trip is really necessary.

In the developing world, however, demand continues to increase. And, that increased demand more than overcomes the slight decrease in demand in the US.

I agree wholeheartedly with your other points, but I want to point out that because petroleum is a commodity with world-wide demand, a decrease in demand solely in the US does not really impact on the price of petroleum.


#6

Good explanation; I wished politicians angling for votes had the courage to utter simple truths like this!

Even John McCain says he is planning to eliminate oil imoprts!! I thought he appealed to less emotional and more rational voters. All posters on the site know by now that eliminating oil imports would involve far more pain than WW II rationing, if indeed it were possible. Our recent post “Is enegry indenpendence possible or desirable” had many good comments.


#7

Google “Peak Oil” and learn…

“Why don’t they build more refineries??” Would you build a new multi-billion dollar facility if the raw material was getting harder and harder to find or obtain?? OPEC is operating at 100% of it’s production capacity. Even Saudi Arabia is now using secondary recovery techniques to try and maintain production. Prudhoe Bay’s production is now down to about 55% of it’s original output as that field is depleted.

Yes, new oil fields will be found, but the easy ones are gone. The new fields never will be able to replace the declining production of the old fields. The explosive growth in demand from China and India, countries with populations that dwarf our own, means YOU CAN FORGET ABOUT CHEAP GASOLINE EVER AGAIN. $3.25 a gallon IS CHEAP GAS!!!


#8

Well put Caddyman; when will you change you name to Fitman or Priusman?


#9

Here’s a article published today on Why Exxon isn’t lowering prices…

http://articles.moneycentral.msn.com/Investing/Extra/WhyExxonWontProduceMore.aspx?page=1


#10

Very interesting, this is the relevant section:

“We don’t start with a volume target and then work backwards,” Tillerson explained. Instead, he said, his team examines the available investment opportunities, figures out what prices they’ll likely get for that output down the road and places its bets accordingly. “It really goes back to what is an acceptable investment return for us,” Tillerson said. In other words, producing more barrels just to ease prices for consumers is not part of the company’s calculations.

If I was a stockholder, that would be exactly what I would want to hear. They are not in the business of supplying cheap fuel, they are in the business of maximizing the return to their stockholders. At the moment, they do not have any incentive to add capacity or increase production. That may change if retail prices increase significantly.


#11

The law of supply and demand isn’t that simple. Since you have two variables, (supply and demand), it could be that supply and demand are both rising. It could also be that the supply curve is shaped in such a way that supply would have to make a big jump to have even a small effect on the price. The shape of the supply and demand curves reflect real market conditions, not vice versa.


#12

In the case of oil (and energy, in general) history has shown the “demand curve” to be very inelastic (i.e., consumption will change very little due to price). Increasing oil production (supply) is very expensive, so the only strategy that makes sense is to maintain the current supply and let prices increase. Increased profit with very little risk, why would they do anything else?


#13

Kudos to caddyman for adding some other good comments!

Regarding Saudi Arabia, there are quite a few experts who are firmly convinced that Saudi Arabia does not have the vast oil reserves that they boast of, and that the reality of the situation is that they are attempting to exploit the remaining known supply as well as they can for the best price that they can get. Your statement about them now having to resort to secondary recovery techniques would certainly support this thesis.


#14

If the supply was more flexible (less tight) each company would try to pump more to get more revenue, regardless of price. Mexico, which really needs the revenue would pump twice as much if it could.

Unfortunately most major oil companies, incluiding state oil companies, can only pump so much without damaging their wells.

The only thing the US government can do is to tell oil copmpanies to invest in unconventional oil (oilsands, shale oil, etc.) and invest in alternative energy, or have excess profit taxes imposed. I’m sure they will comply since both these investments help their long term survival.

BP and Shell are already heavily into alternative fuels and solar power.


#15

Supply and demand does not tell the whole story. Crude prices are being kept up by commodity traders at this point as much as reduced production. If the price goes below $100, there are automatic orders to buy which props the price back up again. Soon as it gets up a little, there are automatic orders to sell to take profits and the price yo yo’s back and forth. Not helping any is the value of the dollar in relation to other currencies so as the dollar drops in value, the price goes up to compensate. Supply and demand really is an over-rated concept with all of the other factors involved.


#16

VDC is correct that I failed to include the international situation, or at least it appeared that way. He is also right IMO about the international situation. In the long run it would be very foolish not to consider the international market situations.

I can only say that I limited my consideration of the international markets in that the price of crude in that international market has not increased in an amount sufficient to account for the US retail price increases.


#17

Good point Bing! Speculators are losing faith in the US dollar, ans since oil is still traded worlwide in dollars, they are investing in a commodity that is very robust price-wise. A littl ebit like gold.

Oil economists will tell you oil prices are made up of several factors:

  1. Basic commodity price, reflecting exploration and production costs. That is about $50-$60 a barrel now since it is the cost of developing marginal and difficult reserves; deep offshore, oil sands, heavy oil in Venezuela, etc.

  2. The global uncertainty factor; Iraq war, terrorism, political instability in Nigeria, Chavez’s antics in Venezuela, etc. This adds anywhere form $20 to $40 per barrel.

  3. The speculative factor of $20-$40 per barrel caused by commodity futures traders. Their prices determine what refiners pay, regardless of origin. No, it’s not OPEC conspiracy that sets the price; that was true in 1973/74, but soon fell apart.

Thsu we could have $60+$40+$40=$160 per barrel soon or 40+20+20=$80 per barrel. World peace is not about to break out, and speculators are not about to go out of business. So, brace yourself!


#18

I agree, it is probably about time to stop trading oil in U.S. dollars. I wouldn’t trust dollars in this environment either.

I seriously doubt the U.S, government is going “tell oil companies” to do anything. As I understand it E-M is reporting profits of about 10% of revenue, that is not unreasonable for a high risk business.

I also would not be surprised to see $150 oil, that will probably translate to $5 gasoline (maybe that will be enough to start to make a dent in consumption).


#19

Maybe the US Government can’t boss the oil companies around, but wouldn’t it be nice if they stopped subsidizing their profits with tax breaks? I wouldn’t mind if they did that.


#20

Agree; the original tax breaks they got when oil was much cheaper now make no sense. But some form of incentive to develop alternate energy sources does.

BP now says their intials stand for “Beyond Petroleum”, and it makes sense to call themselves energy companies. The gas station of the future will have a different set of pumps and plugs.

China will be marketing a plug-in electric hybrid late this year in China initially. Way ahead of Chevy. In this case the firm is a battery company that bouhgt up a car company; tail wagging the dog! The car looks like a conventional compact sedan.

The Chinese are now leaders in high performance battery research.