Price of Oil

[Arc]

Thanks to this post by Coot: http://www.globalaffairs.org/forum/showthread.php?p=345553#post345553

I have decided to start this thread and I hope those at GA with knowledge on the subject will participate with detailed responses. I didn't want to dump the entire burden on Coot.

My question is without nick picking the small details what are the major players and forces that set the price of oil?

Coot has partially explained it but not in great detail and I don't really understand how those things work that he talks about all though I understand the entities he is talking about.

So from the the time the Saudis for instance are ready to sell their oil and set a price at the lowest level how in detail or what I guess I should ask sets the price of oil that the oil companies pay for the crude?

I hope to learn a lot from this thread.

One thing for sure. In order to "control" in the good sense of the word the price of oil you first have to now what determines its price if left alone to the free market. (Free market. There is a contradiction in terms or perhaps even an oxymoron.)

[Arc]

OK, it is time for all you GA slugs especially those with knowledge of economic systems to step up to the plate.

I've always in ignorance assumed the price of oil was primarily set by OPEC--in fact that is WHY OPEC was formed--so the oil producing countries could control the price of oil to their economic value.

Now thanks to Coot's post in another thread linked above that if I read correctly he says that that is not true. Somehow traders or speculators somehow SIGNIFICANTLY set the price of oil which almost doubled in the past ten years and especially has gone through the roof the past year or so.

Now we know that the price to produce and availability has not substantially changed nor has the demand.

So why has oil gone from the thirty plus dollars per barrel to the near seventy dollars per barrel.

If it is OPEC that primarily sets the price we can easily deal with that if we have the the political balls to do so. But is something else that PRIMARILY sets the price as Coot suggests.

What is the story here? Its not that complicated to explain is it? Between when OPEC names its price what determines how much Exxon, Shell, et. al. pays?

[Coot]

Oil is traded as a commodity on the open market, with a futures component and a spot market component. Back in the day, when OPEC drove up the price of crude, they did so by withholding supply. They are doing no such thing now. They're pretty much pumping their wells in the WFO position.

What's driving up the price of crude is fear in the market on the part of the oil companies. They're seeing China take a bigger and bigger piece of a finite pie and they're consequently overbidding.

[Arc]

Oil is traded as a commodity on the open market, with a futures component and a spot market component. Back in the day, when OPEC drove up the price of crude, they did so by withholding supply. They are doing no such thing now. They're pretty much pumping their wells in the WFO position.

What's driving up the price of crude is fear in the market on the part of the oil companies. They're seeing China take a bigger and bigger piece of a finite pie and they're consequently overbidding.

So because of China buyers are willing to bid what they are that is setting the price?

I am not disagreeing with you. I am a dunce in these matters but superficially and backed my lack of sophistication what you say does not seem logical to the degree it is raising the price of oil.

Hmm, to you legal beagles--why not do what is necessary for the oil to be taken out of the private sector and countries have to sell directly to the United States government who then sell to the oil companies directly. (A simple version but that is the general idea.) Or we form an United States version of Pemex.

So Coot, or anyone else, in Coot's scenario what is the value of having a cartel?

[Coot]

Philosophically, I think you'd be hardpressed to find anyone who would seriously advocate for direct US government intervention into a free market.

What's driving the market fear at this point is US consumption and China taking a larger share of the global market.

China's government is directly in the market, via their percentage of ownership in companies. They're also subsidizing cheap energy in their society, and that's leading to shortages, as they're increasingly unwillng to buy all that's available at the market clearing price.

The high prices in the US is also shrinking demand and that is starting to have a downward effect on prices.

It gets confusing, but here's a smattering of market conditions. Oil futures trade down (http://www.miami.com/mld/miamiherald/business/national/12655475.htm) on the New York market, while on the same day, prices are up (http://www.washingtonpost.com/wp-dyn/content/article/2005/09/14/AR2005091400280.html) in Singapore and New York. ;) However, the real NYMEX data (http://www.wtrg.com/daily/crudeoilprice.html) do indeed show prices starting to come down.

[Arc]

Philosophically, I think you'd be hardpressed to find anyone who would seriously advocate for direct US government intervention into a free market.


You are probably correct but that doesn't make it a bad idea. Lets see we nationalize the oil business so OPEC has to sell directly to us. One thing for sure if we played our cards right the price of oil would be at least half of what it is now. That sounds like a good idea to me.

[Arc]

As I've clearly said I am relatively ignorant of how the price of oil is set. And so far based upon the lack of posts I may not learn much more.

But upon further review I am rapidly moving toward the conclusion that the reason we pay such high prices is simply because we put up with it and don't make any effort to do anything about it.

Translation: The ONLY ultimate reason we pay what we do is because we are willing to do so no matter how wrong it is. We freely and voluntarily give over our financial fate to others with regards oil.

[ethics]

New Yorke (http://www.newyorker.com/talk/content/articles/050926ta_talk_surowiecki)r has another angle on the whole price of Gas.



Gas taxes are unpopular in the U.S., although they’re remarkably low compared with those in other countries—and even, adjusting for inflation, much lower than in the late nineteen-fifties. But, of all taxes, a gas tax is among the most fair and efficient. In the late nineties, a survey of forty top economists found disagreement on nearly every issue, but gas taxes had unanimous support.
The gas tax works well for a couple of reasons. First, it relies on the free market instead of trying to tinker with it. Unlike fuel-economy standards, the most common method of reducing demand for oil over the past thirty years, a gas tax doesn’t tell people what kind of car to drive. It simply raises the price of gasoline and lets people adjust their behavior accordingly.


The other, more fundamental virtue of the gas tax is that it brings the price of gasoline in line with its true cost. When all is said and done, cheap gas is an illusion, because our reliance on gas creates a whole series of costs that aren’t factored in to the pump price—among them congestion, pollution, and increased risk of accidents. The most rigorous study of these “externalities,” by the economists Ian Parry and Kenneth Small, suggests that a tax that took them into account would come to $1.01 for every gallon of gas.


There are also hefty costs that aren’t included in that number. The most notable is the cost of having the military protect world oil supplies; three weeks ago, President Bush said that we were in Iraq partly because we could not let terrorists “seize oil fields to fund their ambitions.” In addition, there is a long history of stealth subsidies and tax credits for oil companies. Two months ago, Congress passed an energy bill that will provide tens of billions of dollars in subsidies to energy companies over the next few years in an attempt to stimulate production. One way or another, that is, we’ve been paying to keep the oil flowing. A gas tax would at least let us know what the price really is.

[tke711]

CSM as a good article (http://www.csmonitor.com/2005/0921/p11s01-usec.html), and overview, of the situation.

[dsl987]

Some good articles there.

The oil companies have made good profits for the last year or two, but you have to understand that the refining business has been very cyclical in the past, with big booms followed by big busts. As a result they are loath to invest in a new $5 billion refinery unless they are very sure that a bust is not right around the corner.

Now they've had a good run and are on the verge of expanding their plants to increase capacity and all of a sudden people start threatening to cap their profits, which would pretty much kill any desire to expand their plants. After all would you invest billions into something if you knew that people were going to cap your profits? Better to invest it into something else.

I've thought the idea of taxing gasoline more was a good idea for a long time, as it would discourage gas guzzlers and you could use the extra revenue to either build better public transportation, or offer the money as credits to more fuel efficient vehicles.