$4.65 Gas... WITHOUT AN OIL SHORTAGE

Had an interesting "chat" with my neighbor while washing the LEAF today. I like the guy and have known him for 10 years but he has definitely drunk waaaay too much Fox Koolaid. Anyways, he seemed to think that there was currently a SHORTAGE of oil and that was why gas was $4.65 down at the corner... we needed to drill more... now... Obama is a socialist, terrorist, death panel overlord who wasn't even born in this country, blah, blah, blah. Yawn.

So

He seemed really amazed when I showed him that U.S. oil inventories were generally in the same range over the past few months and had even increased recently. Nothing to warrant $4.65. The retail price being paid at the pump was from only the "IDEA" of an oil shortage! Which led me to the big question. With a very real $4.65 price from just the IDEA of an oil shortage, what will gas prices be during an ACTUAL oil shortage??? He did the perfect 1000 yard stare.

But there IS an oil shortage. There is a shortage of $20 crude oil. Plenty of oil at $200. Todays equlibrium is about $100 so that is the price we pay. If drilling will bring in some $50 oil then it will tend to reduce the price but all oil is settled at the equlibrium. This is how a free market works. Your neighbor may not understand that.

A real shortage exists when there are price controls as Nixon tried after he took our currency off the gold standard.

smkettner said:

But there IS an oil shortage. There is a shortage of $20 crude oil. Plenty of oil at $200. Todays equlibrium is about $100 so that is the price we pay. If drilling will bring in some $50 oil then it will tend to reduce the price but all oil is settled at the equlibrium. This is how a free market works. Your neighbor may not understand that.

A real shortage exists when there are price controls as Nixon tried after he took our currency off the gold standard.

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One word: China

china and india are going to suck up the petroleum and we all need to get off of foreign oil and just use oil for high-end stuff; not commuting, not carrying two 50-pound kids around to school and soccer matches.
the stuff is needed for some things, like flying.
but the way we use it is like feeding pigs on caviar and truffles and lobster meat.

thankyouOB said:

but the way we use it is like feeding pigs on caviar and truffles and lobster meat.

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As long as energy is priced in a way that does not include its real cost in terms of the environment, health and wars I just don't see much changing anytime soon unfortunately. Another thing is how convenient it is to get energy such as gasoline, natural gas and electricity. One does not even have to think about it in this country for the most part. However back during the 1973 energy crisis and it was inconvenient it certainly got peoples attention but was soon forgotten the minute it was no longer inconvenient. Imagine where we would be today if we stayed on that course. Also a ton of profit is still being made with the current status quo when it comes to exploiting earths non renewable natural resources for big business to really change as far as I can tell.

when I watch MLB via there feed is is chock full of those adds for shale gas.
they have a reasonable looking middle-aged guy in a sport coat and shirt open at the neck talking about how innovation unlocked this abundant and carefree resource.
It must play every inning.
not a hint about faucets on fire, pollution of the aquifer, or other ugly results they are seeing in the alleghenies.

Basically, he did not seem to understand that you can't drill your way out of an IDEA.... that he was a captive of his own idea... and that earths oil is running out.

@OB, actually the major airlines and U.S. military are already using renewable Bio-Fuels for some jets. This was the reason I got a diesel F350. Retail Bio-Fuels were coming on in CA but then quickly got bought up and shelved by oil interests. B100 is also price matched to Diesel no matter it's supply. Another fictional supply/demand "IDEA" to become captive of I guess.

smkettner said:

But there IS an oil shortage. There is a shortage of $20 crude oil. Plenty of oil at $200. Todays equlibrium is about $100 so that is the price we pay. If drilling will bring in some $50 oil then it will tend to reduce the price but all oil is settled at the equlibrium. This is how a free market works. Your neighbor may not understand that.

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Well, it is more complicated than that. There won't be more oil at $200, because of the severe demand destruction that will happen at that price. Demand destruction is another way of saying poorer people won't be able to afford gas - and those poorer people won't be in poor countries like China & India, but here in the US.

The problem is, oil's demand is quite inelastic vs price. So, the price has to raise quite a bit to destroy enough demand so that demand comes down to supply level.

Here is an interesting chart. See how little the production has changed over the decade - though the price has gone up 4 times.

Nice chart!

Speculation moves gas prices more than anything else. Oil is a traded commodity.

Train said:

Speculation moves gas prices more than anything else. Oil is a traded commodity.

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Speculation doesn't work over a decade long period.

Most people don't realize that more cars have been sold in China than the US for 2 years running now. Huge traffic jams are common now, absolutely unheard of just 10 years ago.
A true car culture is emerging in China, owning a car is a sign of upward mobility, and nearly everyone in China wants to get one. Right now there are approximately 1 car for every 16 people in China, in the US it is closer to 1:1.

Net result, if China continues to grow at high single digit rates like it has for the last 20 years straight, China oil use will grow significantly.

If you have been following oil news the last few years, china has been locking up oil supply, via acquisition, joint ventures, supply agreements across the world.

Wildcard may be chinese industrial policy to jumpstart the domestic electric car industry. BYD a dominate battery company is getting some serious investments from the likes of Buffett and Mercedes.

China may view electric cars as an attractive path to clean up their horribly polluted cities and drive a domestic electric car industry with an end goal of a large electric car export market.

Coda is Chinese electic car that may hit the US market soon. Volvo is a Chinese company now. Saab will likely be a Chinese company now.

the chart reflects a 10% increase in production and that is the reason oil went up. i dont see how you can say that its the same.

keep in mind, if you are producing 80% of the available supply (2007 estimate) but about 96% of the "easily obtainable" supply, even very small increases can cause a huge spike in price.

oil companies also attempt to access reserves based on new discoveries. they may have a known reserve that can produce more that is held back until another field is discovered.

how oil companies operate at the corporate level is the 2nd best kept secret behind big pharma.

make no mistake, we need to get out of oil and do it fast.

DaveinOlyWA said:

the chart reflects a 10% increase in production and that is the reason oil went up. i dont see how you can say that its the same.

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As I said the production has changed very little over the decade (10% vs 400% in price).

oil companies also attempt to access reserves based on new discoveries. they may have a known reserve that can produce more that is held back until another field is discovered.

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First, the big western oil companies don't control all that much. The nationalized companies control most of the oil production.

Publicly traded comapnies want to show as much reserve as possible - since the stockprice depends to some extent on that. We all know how CEOs was to increase the stock price, get their very fat bonuses and retire. So, no, these companies aren't hiding reserves. If anything their reserves are bloated (some years back Shell caused a major commotion in the market when it reduced the reserves). As for production, all the oil majoes want to produce as much as possible - but are limited in how much they can produce because of infrastructure constraints. Ofcourse they have to continuously drill more just to not reduce what they are producing because of natural declines in existing fields.

This is the reason companies (both western and nationalized) are drilling in more difficult and expensive places. That itself says that all easy reserves are already being tapped.

Recommended reading on this subject is John Hofmeister's book "Why We Hate the Oil Companies". John Hofmeister is the former president of Shell Oil of North America. The book is less than a year old and is an interesting read. He perhaps is more pro-renewables than you might think. There are a lot of quotes I'd like to make from the book that touches on comments made here, so many so that all I can do is suggest you read it.

make no mistakes. oil companies are poised to transition the renewables, but will milk the cow right up to its dying day. and they do that by controlling supplies.

oil companies can easily increase production and dont let them tell you they cannot. that is complete BS. but they will not run out their X year supply at a faster rate until they have found a replacement for it.

and as long as we allow them, they will continue to manipulate the supply. it was laughable to see the congressional hearing with the oil bigwigs telling how they have no control over the open market and speculators are the entity responsible for higher prices. well speculators only flourish because of lack of real information.

who controls the flow of information concerning access and quantity of proven reserves?? because ultimately; they are the ones controlling the price of oil

Dave, I couldn't agree with you more about the oil market being controlled, but there is one quote so germane to the discussion that I cannot resist quoting from "Why We Hate the Oil Companies".

"OPEC members, including countries in the Middle East, Africa, and South America, control approximately two-thirds the world's oil reserves and meet approximately one-third of the world's daily oil demand. OPEC produces twice as much oil per day as the combined global output of all the major international oil companies, including ExxonMobil, Royal Dutch Shell, BP, Chevron, ConocoPhillips, and Total. OPEC is the antithesis of the free market. The volumes of oil it controls dominate setting the crude oil price." (Pg. 98-99)

I don't think that Hofmeister would lie about something that is so factual. I further believe that because areas that would be embarrassing to the oil companies (e.g. large profits) he doesn't mention, so yes he is somewhat self-serving. Because oil is a commodity product, where the oil is produced makes little difference (although some - sulfur content), it still gets fractionally distilled to produce the products that we use. I suppose that we could insist that the oil companies offer oil below what the market price is which would thwart OPEC, but I'm afraid that could lead to real shortages as the profit from new wells would not be as attractive.

we i do know, since they freely announce it, but OPEC seems to be able to change their output volume at will and tightly controls it.

they have increased production in the past to alleviate "shortages" i personally think that they should not be supported in anyway. they have the money to support themselves militarily and any other way. if they want protection, have them hire us

but then again, that is exactly what is happening, just indirectly. that is why oil is cheap here. problem is, we are getting a raw deal and can no longer afford to continue

Just wait till you start paying $10.32 a gallon like here in the Uk, then you will REALLY start to moan lol ;-)

well welcome and need are not the same. i would welcome $5 gas with the difference between market price and that $5 be levied as taxes that would be devoted to building an alternative energy infrastructure.