The Saudis tell Bush they will not increase oil production because there is no one asking to buy more right now. The same article then says the main reason oil prices are rising so rapidly is because China and India have increased the demand greatly. They say are other important factors as well… no doubt!

My question is why should demand necessarily increase price? If I have a concrete plant capable of increasing production at will and the demand doubles, my overhead goes up only slightly, all the other costs and profit remain virtually the same per unit. Profits should rise proportionately to volume and no reason to have to charge more.

I think it’s all crap. The reason oil is so high seems simple to me. The Arabs have a large enough monopoly of available oil for sale on the open market that they can demand whatever price they wish. Who is to stop the Arab oil cartel from raising the price to $150 per barrel? 75% of it will surely still have to be purchased by users anyway. Oil did not go up from about $70 a barrel this time last year to the current $128 because of demand.

JV-12:

My question is why should demand necessarily increase price?

Because it can. Maybe you're just not a greedy shit capable of accepting the simple answer.

Why don't you get this? I have something that 20 people want. I have enough for ten people. I can charge a buttload of cash for that. Suddenly, I have something 30 people want. I still have the same amount.

Have you never been to an auction? Capitalism in its purest sense. How is this not obvious?

Admittedly, not all of it is due to rising demand. There'es some interruption in supply and some uncertainty, leading to speculation.

But you don't get supply and demand?

This is what happens when you send a child to cut a deal with adults. The Saudis know how to work George W. like a truck farmer works an Alien without a Green Card.

After all, he did get a really nice fruit basket in his room at the King's "ranch."

It’s not so much I do not understand supply and demand (although I still have some reservations) it is that I am trying to say the reasons for global oil price increases has little or nothing to do with limited supplies or increased demand. The Saudis said they could increase the supply if there were a demand for it. The supply can handle the increased demand so that should not move prices upwards in itself. Prices are going up because the Arab cartel is a virtual monopoly and can fix prices wherever they want. But I don't hear anyone simply stating it this way.

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Back to supply and demand: If I can make $25 on a baseball glove I currently sell for $100 --- then just because the demand becomes greater than I can supply does not automatically trigger a necessary price increase. They are independent actions.

Lemme pose this Economics 101 question:

If you can sell a baseball glove for $100, and demand suddenly increases, and you don't raise your price what happens?

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Since it's late, I'll tell you. You have a line out your door, and you don't have enough gloves, and a lot of kids go away discouraged. This is what's known as a shortage. Rationing.

Carter gas lines. The elegant thing about capitalism in economics is its rigorous efficiency. People willing to pay the price get the gas. They must have some reason to pay that price. Namely, they have the most economically efficient use for it. It will produce more among those willing to pay than it would if it were randomly distributed.

None of this diminishes the overall detrimental effect of high gas prices. A disaster for the economy. Fuck the eco-wusses, people need to drive. To produce wealth and a high standard of living.

But, if you have limited resources, that's supply and demand. You won't help matters by restricting the market.

Nevermind.

JV:

Last time I looked, oil supply was ok and so was gasoline supply. Both were right in the range of where they were supposed to be. This leaves speculation and futures. Consider Iraq, China, India, tanker shortages, increased demand as Summer approaches, terrorist, refinery shut downs, refinery capacity, promise of a Dem President, increased taxes, Iran, etc.

None of which cuts inventory but all of which threatens supply. When there is threat on supply everyone starts to hoard also.

run75441:

JV:

Last time I looked, oil supply was ok and so was gasoline supply. Both were right in the range of where they were supposed to be. This leaves speculation and futures. Consider Iraq, China, India, tanker shortages, increased demand as Summer approaches, terrorist, refinery shut downs, refinery capacity, promise of a Dem President, increased taxes, Iran, etc.

None of which cuts inventory but all of which threatens supply. When there is threat on supply everyone starts to hoard also.

Yes, that is a good point you make which I can understand. Threats of various natures would have a price effect.

I can also understand when demand is low that would drive the price lower in order to increase demand.

But as long as supplies are ample (and other factors like threats or risks are not present) an increased demand would not automatically cause a price increase ---- all the while knowing that most companies would take advantage of that and do it anyway.

Oil is a valuable commodity.

Divide US GNP by US oil consumption to get a rough approximation of oil value.

2007 US GDP (Current) $ / Annual barrels consumed (2006) =

$13,841,300,000,000 (2007) / 7,592,730,000 barrels (2006)

= $1,823 / barrel

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Allowing that might be a little rich, oil industry analysts knock it back to about 600 GDP$ per barrel.

Settled NYMEX oil price contract = $126.29 per barrel

(Speaking of $126 oil, still plenty of room to the upside)

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Look at your local yellow pages under Automotive. Notice all the commerce related only to cars and trucks. Next, look through the yellow pages to exclude businesses that use no oil (use no energy, no plastics, no motor fuel, etc.) Not many can be excluded on that basis. Oil dominates US economic activity.

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As to demand, people want what they want.

As to supply, world oil (now, liquids) production is topping out.

Saudi Arabian oil declines 8% in 2006

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GW explains.

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Peak Oil Update - December 2007: Production Forecasts and EIA Oil Production Numbers

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US inventories are about "normal", but general perceptions worldwide are that supplies are tight and getting tighter. So oil traders trade.

everyone wants to couch the simple truth in high sounding rhetoric that makes it look like it's a necessary thing to do.

Greed is a simple enough explanation but because our part of the world also functions on the principles of capitalism Greed is a politically incorrect word to use, it's too revealing.

Walmart on the other hand uses the reverse philosophy. They sell many items for less than what they purchase them for in order to create a demand that wasn't there before. This is strictly illegal but just try and stop them.

As I understand it from a friend who does a lot of commodities the price increases come as customers wish to be considered first in line even when they are not. There is an additional fee tacked onto to the product when you want it in a timely manner. Now that the Indians and the Chinese are also standing in line we are all playing a deadly game of competition that drives up the price...this is purely stupid but it is a fact of unintelligent market place survival.

Recently I was looking at properties in the Worcester area to purchase. I quickly cured the real estate agent from a few of his very bad habits one of which included telling me that other people were interested in the property too. To stop him from bothering me with that detail I simply turned my back, walked back to my car and left. He later asked me why I did that ...after which I told him that I would not look at any properties being looked at by other people...." So either keep it to yourself or find properties for me that no one else is looking at because either way I will not compete for the property !! ""

JV:

Supplies and Refinery capacity are adequate for the next 5-10 years and they will go up and down impacting near range prices. Supplies are adequate within the US only, I am not sure about the world.

I also forgot international politics and OPEC. Since the ability to pump supply to the world is pretty much regulated in the Middle East with no alternatives to fill their gaps in production, they become the bottleneck for supply and they establisgh the plateau. In 71(?), Nixon should have been kicking their ass on the embargo and OPEC would have been shattered then.

If you do not like the oil scenario, think about food when ~50% of our food is imported from outside the country. Care to have that held hostage by some cartel? There are some things we should not be so willing to relinquish control over in spite of comparative advantage.

... are as good as anyone here to address the fact that some of the 'demand' is not related to filling gas tanks, there are many investors who are frustrated by the equity markets at the moment and find investing in commodities to be the only game in town.

In that sense, the demand for oil, corn, and bacon exhibits extremes not explained by the mundane behavior of consumers at the pump or grocery store.

that oil should not be a commodity...especially domestic oil.. We cannot control what other nations do but it seems purely stupid to me that our own oil is an international commodity. Venezuelans pay 65 cents a gallon because they don't suffer from the commodities crunch.

You own a business. Demand for your product goes up. You can see how this is inviting others to compete in your industry, right?

So let's say you do nothing. There will be new entrants. That's fine, as long as demand keeps increasing you can keep your market share. What happens when demand softens? You're necessarily weaker. (Increasing price gives you a war chest to, for example, increase r&d and get/stay better, diversify, be in a position to stay viable when the market turns, etc.)

Let's say you decide to increase supply. That costs money (unless you are paying people to be unproductive). And with that comes risk. Why should you take all the risk? (Increasing price is asking your customers to share the risk in you expanding for them.)

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Also, you refer to the "Arab oil cartel". You mean OPEC? Just so you know, not all brown-skinned people are Arabs. Not all Muslims are Arabs. Not all non-white oil-producing countries are Arab. Arab countries are about half of OPEC, OPEC produces less than half the world's oil, putting the Arab group at somewhere around a quarter of the world's market share (probably somewhere around the total of Canada, USA and Mexico .. especially if you consider Iraq as a US Occupied territory).