The great oil scam

[MadHound]

I, as many of you, have watched as pump prices have shot through the roof over the past few days. While your pricing may vary, I will use mine as the only hard number s I have access to.

Last Monday, a gallon of regular gas was running at 2.95/gal. Yesterday, it was running at 3.15/gal. A rise of twenty cents in three days.

All of this is due to the situation in Libya. Apparently Libya is such a vital oil exporter to the US and the world that unrest there is capable of moving markets in a dramatic fashion.

Except Libya's oil doesn't, in the bigger scope of things, really contribute that much. In fact Libya contributes only two percent of the world's oil supply, not to mention that Libya's oil only makes up about 1.53% of the US's oil imports.

Yet prices at the pump have jumped nearly seven percent, while wholesale oil has jumped more than ten percent. Why is that?

These price hikes become even more baffling in the light of another fact; namely that the price hikes for gasoline is on fuel that was bought at a much lower price in late December, early January. The sad truth is, this oil that is now being bought at $100/bbl plus is oil that isn't scheduled for delivery until April.

If oil companies were actually abiding by the rules laid down by Adam Smith, oil that was bought in early January wouldn't go up in price, since the cost is already expended. Each and every gallon of higher priced gas simply means greater profits for oil companies. To add insult to injury, they are jacking oil prices up way beyond pricing reality. Instead of accounting for a supply shrinkage of two percent with a commiserate price hike of two percent. Instead, we're seeing a price at the pump that has gone up seven percent to make up for a two percent drop in supply. And we're paying those exorbitant prices for a product whose cost has already been paid for.

Needless to say, some bright folks have figured out the scam that this is, and the stocks of US oil companies have gone up. If I were a heartless bastard, I would invest in oil as well. What other product can you scare people into paying ever higher prices for a product that has already been bought, whose costs are fixed. Better yet, what other product can you use fear and turmoil to bump that price all out of proportion to the actual problem?

It's a racket, and sadly, it's only going to get worse.



So, let's recap. We're paying a price at the pump that is threefold exaggerated

[leveymg]

1. Oil and commodities speculators paid good money to exercise that right to rip us off.

Article yesterday about the many, many millions that the major oil companies spend to control Washington. Link in here: http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=497908&mesg_id=498036

[MadHound]

3. Oh don't bother, I already know

Perhaps not about the specifics, but I had family in the oil business and know quite a bit about what goes on behind the oily curtain, who gets paid what to perform which services.

Meanwhile we continue to get screwed.

[leveymg]

6. BOHICA 4ever, until we do something about it, anyway.

Jimmy Carter was the last to even talk about using emergency powers to control that industry. He didn't - they and Reagan-Bush screwed him anyway with the Iran-Israel hostages for arms deal.

[Uben]

2. Libya has light crude oil, the most desirable....

I don't know if that has anything to do with it, but it's sure suspect that Libya contributes so little to the total import of the U.S. oil. Is it speculation? Again?

[MadHound]

5. That's the excuse that they're putting out there,

But the fact of the matter is that several major players export light sweet crude, Saudi Arabia, etc. The fact of the matter still remains, Libya provides only 1.53% of our oil imports. It could be light, honey sweet, fine whipped crude with cherries on top, but if you take it out of our pipelines, it would be little missed. It simply isn't that much.

[Spider Jerusalem]

14. Several countries export light, sweet crude, yes.

None of them has the spare capacity to make up for 1.2 million barrels a day of light, sweet crude being taken out of the global market. Saudi spare capacity is heavier higher-sulfur oil. Texas doesn't have the spare capacity; the North Sea doesn't. And oil is traded on a global market. And 1.2 million barrels a day, when production and demand are both at about the same levels? Is quite a lot. Remove it from the equation and you suddenly have demand imbalance and resource competition that leads to much higher prices.

[MadHound]

15. Yes, but the thing is,

You're only taking two percent out of the world market. Again, I don't care if it is honey sweet crude with whipped cream and sprinkles on top, it is still just two percent of the supply. Not to mention that we won't feel the actual drop in supply until April:shrug:

Sorry, but that excuse simply doesn't ring true.

[Spider Jerusalem]

16. I'm sorry that you don't understand economics.

Demand: 86-87 million barrels a day. Supply, pre-crisis: c. 86 million barrels a day. Remove 1.2 million barrels a day of supply; demand stays at the same level. What happens to the price?

[MadHound]

17. I'm not arguing that the price shouldn't go up,

What I'm arguing is that it is going up far beyond the effect that removing that oil from the supply chain warrants.

We're seeing the loss of less than two percent of our supply(never mind that other oil producing countries have said that they'll make up the difference). Yet we're seeing price increases that are running at almost seven percent. That's not economics, that's price gouging.

[Spider Jerusalem]

18. You're making the mistake of assuming...

that price response to supply disruption on an open market is going to be directly proportional; it isn't. Especially not in a situation where margins are razor-thin and suddenly available supply is at some level below demand; it doesn't matter HOW MUCH LOWER, because no modern economy can function without oil. So the price response is not going to be directly proportional. Take away 2% of available supply, demand remains the same, prices may increase by 20%. Or 50%. The US uses 20 million barrels of oil a day and imports over 11 million. What do you think would happen if suddenly a million or so of those 11 million barrels weren't available, in terms of the price? Given that it would mean market competition with other oil consuming nations for a limited resource?

And other oil-producing countries have said they'll make up the difference? How? Keep in mind that we're talking about high-grade light, sweet crude. Saudi spare capacity is "Arab Light", which is much higher in sulfur and which few refineries can process. We aren't talking about a like for like replacement. All crude oil is not the same. And it remains to be seen whether other oil-producing countries can make up the shortfall; Saudi Arabia claims to be able to, but their total production, at c. 8M bbl/day, is 20% lower at present than in the 1970's. If they can, they will; it's not in the interests of oil-producing countries for price spikes to lead to recessions and demand destruction. But the idea that they can is at present more an article of faith than a proven fact. And in any case there remains the problem of refinery processing of higher-sulfur crude oil; since fewer refineries can process it, even if crude oil production is ramped up to replace missing Libyan production the refinery problem creates a supply chain bottleneck with similar knock-on pricing effects.

[hobbit709]

4. And when the price of oil drops why does it take a month at the pump?

The answer is quite simple: PURE UNADULTERATED GREED

[dkf]

7. The scam is that our economy and way of life depend on us paying pretty minimal amounts for oil.

We use other countries natural resources and we have the great standard of living in comparison. It should be a no brainer that these countries want more for their oil. But we should also be smart enough to realize that being dependent on their oil puts us at their mercy. Obama's biggest disappointment is that he has not been more forceful on getting our country off fossil fuels.

[MadHound]

8. We saw the big warning signs back in the mid-late seventies,

And still continued to play the oil game, making us increasingly vulnerable to foreign actions.

What's really sad it that if we had started pursuing wind and solar in '79, we would be energy independent by now. This was a point I kept bringing up during high school debating season, yet here we are, over thirty years later, still having the same old stupid debates.

[dkf]

9. Yes. It is too bad Carter left the Presidency kind of discredited as it weakened his important

Efforts to get us off oil.

All the best Democratic ideas were reversed by short sighted Republicans. They have done such a disservice to this country I laugh at the whole usurpation of the word patriot.

[TreasonousBastard]

10. Exactly the same thing happens with orange juice, bacon, and...

too many other things to count that are based on traded commodities. The big difference is that US commodity trading is heavily regulated and can't show that much of a swing in one day.

It's also fairly standard retail practice to adjust prices on the basis of what the inventory replacement cost will be-- the milk you buy today is priced on the cost of the milk they order tomorrow. (Well, they try, anyway-- sometimes competitive pressures get in the way.)

Is this good or bad? Personally, I can't say. I don't think anyone can. The commodity markets occasionally have their uses and stop even worse price swings from happening, and occasionally the traders get stuck at a high price when future prices are tumbling. Price spikes tend to be temporary, though, and eventually the "right" price shows up.

I suspect that if we managed to get rid of commodity speculation (How? No one can guess) it wouldn't cause too much rack and ruin. The problem is that right now any attempt to significantly change things means changing the fundamentals in the way the world does business-- and that's something no one wants to try.

[napoleon_in_rags]

11. Its about speculators, prices are complex.

My thought is that the price of oil reflects simply what people are willing to pay. speculators believe the price is going up in the future, so they buy and increase the price. Its a bet that things are going to worse before they get better, and that they can sell higher than they bought. So you don't have a rule where 2% decrease in supply means 2% increase in price. (Reducto ad Absurdum, does a 100% decrease in supply mean a 100% increase in price? If there was one barrel of oil left on earth would it cost $200?) You have things with commodities where life and death might depend on 10% of the supply, and the rest is discretionary, you might have only modest prices increases until the supply gets beneath say 20%, then prices go crazy. Salt would be a good example of something like that.

[TransitJohn]

12. If anybody was serious about conservation or environmentalism, we'd be paying a lot more.

But, no one cares.

[Spider Jerusalem]

13. Well, actually.

Libya is a producer of high-grade light, sweet crude which is mostly exported to Europe and China. Shortfall in supply from Libya means that the consumers of Libyan oil will be looking for replacements elsewhere. The available spare capacity to make up the million or so barrels a day is oil of inferior quality. So there's increased competition for limited supply when supply is already at a level roughly equivalent to total demand, with no slack in the market; of course prices go up.

And you're paying a price at the pump that's about half of what it ought to be anyway. Compared to the rest of the developed world? Americans have very cheap fuel. Higher prices, in the long run, are the only way to encourage investment in transit infrastructure and a shift to more efficient vehicles.