Why has the price of oil been dropping?

[stopharian]

This is totally counter intuitive to me. Crude inventories today came in quite a bit lower than expected. The gulf states are just cleaning up from Gustav and are waiting for Ike to hit.

The economy is circling the drain and Lehman Brothers looks like it is about to sing its swan song, yet the dollar is getting stronger, and crude prices continue to fall day by day.


It has been said that the price was driven up by speculators and that lots of funds are now in a sell off to get out of oil, this coupled with at "global slowdown" has caused the price of of oil to drop. But I dont know. Somehow it doesn't make sense.

[avolkiteshvara]

Drilling in Alaska and Offshore worked. We should put a Rig in everyone's back yard.

No seriously though, I think OPEC and the world saw an adjustment of elasticity is what it basically boils down to. We're ready to go green in a sec if it pinches our pocket too much. Not sure you could've said that 2 years ago.

[Ferrus]

The OPEC adjustment and the investment cooled off a little as the dollar's precipitous slide has slowed down a little.

We are still in the $110 territory for ever more, I'd say, and expect prises to rise early next year again.

[sorabji_66]

This is totally counter intuitive to me. Crude inventories today came in quite a bit lower than expected. The gulf states are just cleaning up from Gustav and are waiting for Ike to hit.

The economy is circling the drain and Lehman Brothers looks like it is about to sing its swan song, yet the dollar is getting stronger, and crude prices continue to fall day by day.


It has been said that the price was driven up by speculators and that lots of funds are now in a sell off to get out of oil, this coupled with at "global slowdown" has caused the price of of oil to drop. But I dont know. Somehow it doesn't make sense.


For the 10 trillionth time...

It's the price where supply meets demand on the market.

It fluctuates.

[garak]

For the 10 trillionth time...

It's the price where supply meets demand on the market.

It fluctuates.

Are you belittling the act of analyzing WHY the price fluctuates?

[jittus rye]

regardless of the price, there's a shitload of oil. it is in people who own oil's best interest to create artificial scarcity. Like the diamond industry, except not as bad and oil is actually useful.

[garak]

regardless of the price, there's a shitload of oil it is in people who own oil's best interest to create artificial scarcity. Like the diamond industry, except not as bad and oil is actually useful.

Not for long (http://en.wikipedia.org/wiki/Image:PU200611_Fig1.png). Demand isn't exactly gonna go down easily, either. It's not going to be pretty.

[jittus rye]

Not for long (http://en.wikipedia.org/wiki/Image:PU200611_Fig1.png). Demand isn't exactly gonna go down easily, either. It's not going to be pretty.

What the hell? This is an unrelated response to my post. Oil production going down is not related to oil supply. I said artificial scarcity not REAL scarcity...

[ryan_m_parr]

Not for long (http://en.wikipedia.org/wiki/Image:PU200611_Fig1.png). Demand isn't exactly gonna go down easily, either. It's not going to be pretty.

I was afraid of that. Clearly the supply is only as readily available as the sources. Without the sources the companies rely on going back into old sources to try and obtain whatever was left behind from previous drilling.

Energy efficiency has also been derailed by lacking interest in alternative methods, by government.

On another note, irregardless there do seem to be shifts in prices before the supply is brought to the shores for use, some of which occur well in advance of the actions from overseas. If Saudi Arabia increases production and we await the time it takes to bring it from overseas by boat, naturally the prices should not increase tremendously because people aren't going to increase consumption until the prices can be brought down. There are prices reflected in artificial influx.

[C.J.Woolf]

We are still in the $110 territory for ever more, I'd say, and expect prises to rise early next year again.
Not long after the US elections. Hmm...

[slacker]

Election year - wink wink between the current admin & Saudi Arabia

[avolkiteshvara]

Election year - wink wink between the current admin & Saudi Arabia

True. But it also jumped phenomonally in an election year.

[ocop]

True. But it also jumped phenomonally in an election year.

Just enough to get the sheep chanting "Drill, baby, drill!" What they don't tell people is that offshore oil isn't necessarily going directly to the US market, and is still going to be sold at world price even if it is, thus the net effect on "energy security" is about 0. Maybe even negative if it derails/delays funding for new public transport/PHEVs/etc.

And since I'm ranting, the bottleneck for US oil is refining, not necessarily supply. You can have all the crude in the world but it doesn't mean jack when your refineries are maxed (when not retooling, that is).

[Ferrus]

Demand isn't exactly gonna go down easily
It is elastic to a certain extent, how much of that elasticity we have seen stretched with the economy floundering recently I can't say.

[Guitarded]

The economy is going to miraculously look really good in the next couple of months before the election. This will serve to effectively make-limp the democrats ammunition against the republican economic philosophy.

People will stop thinking about making the economy better, and that will leave the republicans with plenty of elbow room to make this election about drama and wedge issues, while keeping the economy, our occupation of Iraq, education, health care reform, and other issues at arms length.

After the election is over, and the oil companies are done with having to make their political puppets look shiny, they will raise oil prices higher than they were before they dropped to make up for lost profits.

Watch it happen.

[demagogic_schizoid]

true that. it's not like the world's most powerful country is just going to implode, rather the fuck over will be carefully managed as always. as you can see Milton Friedman has already been buried by Fanny and Freddie*. what a shock! the phrase "privatisation of profit, socialisation of risk",comes to mind, now who said that?...

*not exactly unprecedented considering Pinochet, the world's first neo-liberal leader, told him to fuck off and fired all his "Chicago boy" followers way back in 1982, for almost plunging Chilean society into anarchy with his disastrous deregulation policies.

[Spartan26]

It has been said that the price was driven up by speculators and that lots of funds are now in a sell off to get out of oil, this coupled with at "global slowdown" has caused the price of of oil to drop. But I dont know. Somehow it doesn't make sense.I think this is exactly it. Earlier this year when OPEC said they "had no idea why oil was trading so high and had no control over that and blah, blah, blah, we won't raise our output, wah, wah, wah," there was actually more truth than most Westerners wanted to believe. Institutions were buying up oil as an asset class investment. It's easy to do, the margins are ridiculously low. You have investment banks like JP Morgan putting up 5% of the total amout of oil shares, then watching the price go up as others high volume investors, corps, foreign countries, etc join in. From the beginning of 2007, the price of oil goes from $60/barrel to nearly $150 a year and a half later. Portfolios increase on fantom money.

Then just like any other investment, once you've met your objective, you get out before prices decrease. Since the world isn't going to give up oil use overnight, what would cause anyone to get off that ride all the sudden. Fear of regulation (http://www.sagefieldpost.com/sagefield_post/2008/06/george-soros-se.html) might be one. I'm not going to discount other theories conspirarcy or elsewise, such as big oil wanting the panic to set it to get public pressure on congress to lift drilling bans that would help them should their party lose the white house, increase the backlash against China and India, etc.

Considering the disasterous effects deregulation had on energy w/Enron or mortgage trading and the likes of BearSterns, institutions managed to sell off before they cannibalized themselves. Like all the other cases, telecom, cable, engery, mortgage lending, it was the consumer who took it in the shorts for oil's big gain. Companies made a lot of money in a very short amount of time and they were fine with it.

[Ferrus]

The slide of the financial markets and the impact this will have on oil is yet to be decided, I'd say. It will lower demand, but it will also put pressure to buy stockpiles of oil and a good investment bet - which is what was happening before.

[demagogic_schizoid]

^^stagflation

[Ferrus]

^^stagflation
Exactly.

As a sidebar, Keynesian economics was 'discredited', because of this, in the 1970s. The monetarists and supply siders argued, at the time that stagflation was the direct consequence of Keynesian policy.

The Keynesians always countered that the oil prices had shifted the aggregate demand unfavourably, and their theory was never really tested.

After years of supply side economics, the current oil price increases seem to be suggesting the Keynesians had a point.

[demagogic_schizoid]

Keynesianism at the time had to go, the reconstruction of the central countries post-WW2 had been exhausted as a means for profit, and therefore free trade had to be used to recolonise the periphery.

Now that cycle of globalisation too has been exhausted and Keynes is back.

Friedmanism was not stupid for the people who implemented it, it was rational, it made them huge profits. The long term future of humanity was never their interest.

[Ferrus]

Friedmanism was not stupid for the people who implemented it, it was rational, it made them huge profits. The long term future of humanity was never their interest.
Good point. Most ordinary people connived at it too because it meant cheap capital, well look where that has got us.

[thod]

Forget notions like supply and demand setting the price. The markets are dominated by speculators and not producers and users. I short oil because I think its going down and vice versa. I don't have a clue what a fair price for anything I trade is, and I don't care.

What happens is I look at my charts and make my bet which way its going to move. Every other trader does the same. Collectively we move the market that way. When news of bad US retail sales comes across the ticker, I jump in and short the dollar trying to get in before everyone else. I don't calculate how much that should drop the dollar.

The thing is this a zero sum game and for you to make money someone else must lose it. Thus the price goes up until the average trader turns bearish and down until he turns bullish. Fundamentals and news are only important in how they effect trader psychology. If I see a bullish indicator in the oil chart then I go long, everyone else sees it too and goes long, so the price rises. Nobody cares about producers and users. They are a small part of the equation, speculators set the price.

I really have no clue how many Japanese yen are worth one Swiss franc. Yet still I trade them. When I short oil, I am not selling oil that I do not own. I am making a bet that it will go down. I never have to deliver any oil, I simply pay the price difference if I get it wrong. Thus there is an infinite amount of oil in the world and supply and demand do not matter.

I will trade many times a day buying and selling the same item according to how I think the price will go.

[Dark Razor]

Forget notions like supply and demand setting the price. The markets are dominated by speculators and not producers and users. I short oil because I think its going down and vice versa. I don't have a clue what a fair price for anything I trade is, and I don't care.

What happens is I look at my charts and make my bet which way its going to move. Every other trader does the same. Collectively we move the market that way. When news of bad US retail sales comes across the ticker, I jump in and short the dollar trying to get in before everyone else. I don't calculate how much that should drop the dollar.

The thing is this a zero sum game and for you to make money someone else must lose it. Thus the price goes up until the average trader turns bearish and down until he turns bullish. Fundamentals and news are only important in how they effect trader psychology. If I see a bullish indicator in the oil chart then I go long, everyone else sees it too and goes long, so the price rises. Nobody cares about producers and users. They are a small part of the equation, speculators set the price.

I really have no clue how many Japanese yen are worth one Swiss franc. Yet still I trade them. When I short oil, I am not selling oil that I do not own. I am making a bet that it will go down. I never have to deliver any oil, I simply pay the price difference if I get it wrong. Thus there is an infinite amount of oil in the world and supply and demand do not matter.

I will trade many times a day buying and selling the same item according to how I think the price will go.

So, if we ban speculating and the stock market and send all you traders to the Gulag, will that fix stuff? I am asking solely for informational purposes, of course. :whistle:

Seriously though, I do think the financial markets are an abomoniation and should be abolished, they serve no productive purpose and are entirely useless, parasitic enteties, and the same is true for the people who work there.

I don't think though, that the effect of speculation overrides fundamentals. If the price were driven mostly by specualtors then why has it been so low for such a long time and has now gone up so much? Certainly supply and demand are the driving cause of oil price. The speculators follow the trend, thery don't set it.

The US is in a ressecion now and has been for some time, even though they are using all manner of creative statistics to cover that fact up. The major European economies (specifically Germany) have had two quarters of negative growth now as well. China (and India?) have also abolished their lavish fuel subsidies, and demand for petrol should drop there as well, though I don't have any numbers unfortunately.

[Ferrus]

Seriously though, I do think the financial markets are an abomoniation and should be abolished, they serve no productive purpose and are entirely useless, parasitic enteties, and the same is true for the people who work there.
Rentiers are much the same. They seem tolerated because they have weaved themselves so much into the fabric of everyone's lifes unjustly that their existence is considered fair and natural. Government's know the financial market drives business at all levels with capital.

Which is funny - as only 300 years ago the Catholic church in the feudal system, and many other Christian denominations, still considered moneylending and usury to be immoral and corrupt occupation only suitable for Jews. It was a strictly taboo way of making money. Marx's point on the construction of class consciousness and the moral-political super structure is well taken.