Oil: Supply vs. Demand

After all the speculation about whether speculators were behind this summer's oil price spike, there seems to be widespread agreement (see here, here, here, here, here, and here) that the more recent backslide in oil prices is due to one cause: a fall in worldwide demand.

Demand. That's almost as old-fashioned as proper tire inflation. In fact, it's connected. But weakening economies, from the US to China, will be needing less oil. Price goes down. Seems like Econ 101.

So why are the Democrats in Congress, and the Obama campaign, still fluttering with anxiety to join the "Drill Here, Drill Now, Pay Less" campaign introduced and orchestrated by Newt Gingrich? Even when it's provable that manipulation of demand has a far more immediate and measurable effect on oil prices (and ultimately gasoline prices) than any contemplated drilling here, or anywhere near here, wherever here is?

Could it be the well-established Democratic wince reflex in the face of determined, if demagogic, Republican sloganeering? And will this post end without any other punctuation besides a question mark?

Comments

[krocklin]

If any rational person evaluated all the arguments on this issue, he would see the red flags going up that we are being gamed by the Republicans. Just as they used 9/11 to invade Iraq, they are going for drilling as a diversionary issue under the cover of this crisis. The Shock Doctrine indeed.
First of all, demand for oil has increased from 76 billion barrels per day to 84 since 2001. That is around 10%.
Secondly, we already have the technology to reduce the 25% of world usage that we (the U.S.) represent. Even without any government subsidization or sponsorship of the development of alternative sources of energy thanks to Republicans. It is called fuel efficiency in our vehicles.
Thirdly oil companies have no incentive to drill for oil if they are enjoying record profits in the current environment..
But will the Democrats hit back hard and expose the specious claims of the oil drillers, who are just seizing on a political gimmick ?
What Obama has said is fine - ok drill, but we want more in return than we have gotten so far in the way of conservation and government incentivized development of renewable energy. At the same time he should say drilling isn't going to do us any good and oil pollutes and is not the energy source of the future. Nor are there enough reserves to provide for our needs. So we need something else.
He should be turning the whole argument around.

[drmarkan]

While you make a good point about lower demand causing lower prices, this is only half the story. When the supply increases over the demand, prices drop even more. We have to look at the actions that OPEC may take in the future. If they decide to pump less barrels of oil a day, then supply can balance out demand and keep the price steady. However, if they decided to decrease the supply to below the current demand, then the price will begin to increase again. This is wholly out of the hands of the USA because we are not an OPEC nation. If you watch CNBC or Bloomberg regularly, you always hear the oil ministers of OPEC nations discussing whether they are going to decrease the supply or not.

If the USA were to drill, this threatens the monopoly that OPEC has and forces them to play fair. If they decrease supply, then the US can increase it. This would keep prices lower. The OPEC nations could not afford to get into a pissing match in this situation.

For people who are against drilling, the only argument has to be an environmental argument because an economic argument won't hold water. Some people will argue that the environmental impact will have long term economic consequences. Unfortunately for them, these arguments are extremely weak. I know that will upset a lot of people here, but it is the truth.

[krocklin]

Environmental consequences are not the only argument agains oil drilling. Whether there are enough oil reserves to provide for domestic needs is the overriding issue. There is little evidence that there is and there has been plenty of probing.
If enough oil reserves were proven to exist, that would be a different story. But its a pipedream, as evidenced by Republican references to oil shale and coal extraction, technologies that don't even exist.
If the reserves were viable and actually existed the oil companies would have more incentive. Right now they aren't too enthusiastic about undergoing the expense of oil or natural gas exploration - a factor the oil drillers don't even consider.

[drmarkan]

I disagree with you here. Private companies are bidding for the rights to drill for oil, so they must see some benefit to this. The reason I find the point you are making moot in regards to my first post is that the determination to find value in drilling does not affect the consumer either way. It is a private investment. If there is absolutely no oil, then the stockholde­rs/investo­rs are losing money, not the average Joe. This is why I believe the only argument to make is an environmental one.

[TxAggie]

How do you figure that oil companies "aren't too enthusiastic about undergoing the expense of oil or natural gas exploration" when the rig count is at a 22 year high and oil companies anre working at break neck speed and effort?

[Rjmartinelli]

Perhaps if you were considering the fact that the Democrats only started moving towards the possibility of drilling after the "G10" proposition that would allow a little bit of regulated drilling but push forward a lot of tax hits on the oil companies and regulation that they've been looking for...it might make a little more sense.

You're looking at the short game. They're playing the long game.

[maab76]

Can anyone say "Public Transportation" in a similar form to Europe?

[dannyS]

yes, yes, yes.
My congressman just sent a pretty flyer to every house in his district talking about his energy plan and NO MENTION OF PUBLIC TRANSPORTATION.

[PaHairO]

Good question, Harry.

Here's my off-the-wall guess:

um, because the Democrats, headed by Barack Obama, are literally re-defining gutless politics ?

[davidly]

Belief You Can Change In 2.0.
'08

[provgrays]

It's about perception.

Ours is the land of the Quick Fix. More drilling seems proactive and gives the illusion that it will lead to lower prices soon after it starts. The Dems are embracing the idea to get votes from rockheads who who refuse to acknowledge that it will take about a decade to realize minimal savings on a gallon of gas.

If new cars were required to get an additional three to four miles per gallon, the resulting reduction in demand would result in more savings than new drilling could ever hope to realize. The rockheads cannot wrap their heads around this idea and thus, the Democratic flip flop on domestic drilling.

[maab76]

Yes, it is about perception, courtesy and the willingness to listen to the "solutions" of many of our citizens. There is always more than one way to solve a problem. Oil and gasoline are problems for us Americans. As we brainstorm ways in which to reduce demand and price for the energy, we may make a lot of hilarious suggestions as well as a lot of very workable ones. Acknowledging that a hilarious one can be a "part of a larger plan" keeps with conversation going by not embarrassing any contributor. When you call an idea stupid, it cuts off further contributions, perhaps the ones that would really solve the problems. If your suggestion is evaluated as stupid, would you willingly participate in the bigger picture? Most would remove themselves from the conversation and bad-mouth it at will. Perhaps a tv brainstorming session would be helpful.

[PrairieDog]

Keep in mind that many of the the same companies that McCain wants to "drill now" are the ones gouging us at the pump. Exxon's recent record profit comes out to over 5 1/2 million dollars an HOUR. That's just profit. For those saying they need high profits to fund exploration remember this amount is after they write off the exploration & production costs.
I have to wonder if this insistant mantra of McCain's is masking something else. Remember the energy "crisis" a few years back in California. The GOP used this as a means to recalling the Democratic governor even though Enron & other close Republican allies in the energy industry were in collusion to manipulate the market to create the phony shortage for their own financial gain. And as bonus the GOP got the Governor's office. But Enron was such an insider to the point of writing favorable policy for the Bush admin (to help get back all those donations) that it's hard to believe the Republicans weren't in on the criminal energy ruse. Is something like this happening now with the oil prices?

[TxAggie]

I have seen the EXXON profits expressed as $1500 per second, while they are paying $4,000 in taxes per second. Do these taxes RECORD TAXES seem excessive? Perhaps we should put a windfall profits tax on Uncle Sam?

[provgrays]

And don't forget that according to Government Accountability Office, two thirds of corporations in this country pay no taxes at all.

[mssisyphus]

Supply and demand is, of course, a factor, and the fact that China removed 2 million drivers from their roads for the Olympics just might have some roll in this drop in prices, which means that once the Olympics are over, there will once again be a spike in gas prices.

I don;t believe that supply and demand has as much to do with it as the collusion of local stations around this country to keep prices up. My small town has three gas stations, which all immediately jump in price and stay within two cents of each other, sometime changing prices upward twice a day, yet when I hear on National News that a barrel of oil has gone down, it sometimes takes a week or more for our local stations to drop their prices of gas.

When I was a young person, back in the gas crunch of the 70's, a station owner could not raise gas prices until they had sold all of the reserve in their tanks that were purchased at one price, where as now, it seems to have gone by the way side. There is no way these stations empty the reserve they have twice a day.,

Apparently, the fox is guarding the hen house!

[bronceye]

Take into account that it is the oil companies reps that we have to believe in order to accept these stats. However, if there can be some acceptance that there is a slight reflection of truth in what they and the white house(inseperable) say, there are some terrible consequenses to face. We have 3% of the oil reserves. If we scurry to chicken little's cries to drill here, drill now, we can consume that 3% in short order. Then what? When we have none, there will be an available supply of cheap crude? A myopic vision for an intellectually incurious group of morons. Remember, Russia has twice as muich oil as Saudi Arabia. Ahhh, creating security for our grandchildren. We should be ashamed as we have exposed ourselves as totally self serving and our future generations have been cast adrift. Drill here, drill now, then go freeze in a cave.

[EinChicago]

"Even when it's provable that manipulation of demand has a far more immediate and measurable effect on oil prices (and ultimately gasoline prices) than any contemplated drilling here, or anywhere near here, wherever here is?"

Ummm. Could it be because manipulation of demand AND increase of supply has a far mor measurable and immediate effect on oil prices than simply saying "suck it up and suffer more"?

[CyrusBeaucephus]

ummm could it be that Repubicans will never endorse conservation, but they will always go to bat for the poor little Oil Companies like Exxon, so that they can pollute more and make obscene profits. You do realize that if we were to hand Big Oil everything they wanted it wouldn't affect prices at the consumer level for years? of course you do

[twofish]

According to PBS' Nightly Business Report, commodities traders are now shorting commodities due to the generally cooling economy. Oil is a commodity.

[Durango]

We are continuously being told that energy prices are a result of supply and demand. That it is entirely the "free market" art work.

Except when it isn't.

Yesterday the BLM put 55,000 acres of the environmentally sensitive Roan Plateau in Colorado up for leasing for natural gas.

According to the news reports this morning, the bids were about 6% of what was expected. There is estimated to be up to 8 trillion cubic feet of natural gas.

The energy companies blamed "environmental protests" for the lack of price received.

Which begs the question: What in Hell does that have to do with market forces?

Apparently natural gas is not as valuable as we have been led to believe.
Only 6% as valuable. As the market shows.

(incidentally, in this corner of the San Juan Basin, one of if not THE largest natural gas fields in the USA natural gas went up 25% last year, and is predicted to go up another 20% this winter)

Or else the market DOES NOT control the price of the commodity.

PS This is not an exploratory field. No risk involved. They know the gas is there.

[mayahbird]

That whole argument makes no sense. Why would you drill for gas or oil and by doing that drive the price down???? They are now making record profits. Would you do anything to change that if it were you that owned the oil company????

[LeftRight]

That's the point. They are not drilling where they know that they have energy sources BECAUSE they are making record profits!

[BigRube]

What about the Haynesville shale field? Estimated at 200 to 300 trillion cu.ft. and the Ft. Worth field estimated at 150 to 200 trillion cu.ft.. And their drilling there now and have been for 2 years.

[BigRube]

What about the Haynesville shale field? Estimated at 200 to 300 trillion cu.ft. and the Ft. Worth field estimated at 150 to 200 trillion cu.ft. And there is drilling going there now and have been for 2 years.

[billw8017]

The fall in demand is due to the higher prices and indicates that these were not strictly market prices but the effect of external forces. Sure, the discovery of a huge new source could increase supply and drive down prices but this isn't what is happening. The price surge is due to a speculative bubble.

I believe that because of deficit budgeting there is an excessive amount of dollars in circulation. This money floats upward to more politically powerful people as prices and wages are otherwise controlled. Then, it must be spent (invested, whatever) and, being beyond what the economy can absorb without disruption, the money breaks out into successive bubbles.

So, higher prices are simply the Bush taxes in a country that doesn't cover its expenditures with actual taxes. The Federal Reserve tries to cover the failures of the bubbles by pushing out more money. Senator McCain has actually urged that we meet high gas prices with a 'tax holiday." This isn't just wrong, it's hilarious.

[WritusMaximus]

Leave it to the Russians to help us in the War on Drugs!

[WritusMaximus]

I hear that any oil from new U.S. drilling is headed for the world market---yeah, U.S. oil priced at the world market, which basically means forces OUTSIDE the U.S. will still have major influence on price. The effect is estimated to be

[Donald Wolberg]

Many of us are told many things that have little or no basis in fact. One wonders where the notion that "New" oil will end up elsewhere originates. It makes no sense to supply oil to places with oil rather than places without oil--sort of the taking "coal to Newcastle" idea. However, in some circumstances, oil, as anything else can be traded or exchanged: sort of the idea of sending a tanker to Japan from the West Coast in exchange for a Japan purchased tanker to Louisiana from the Mideast--makes the transport more efficient and lowers cost.