Why is oil $86 a barrel?

[Kurt_and_Hunter]

I was wrong about the 2007-2008 oil spike. It appeared impossible to me that willing sellers would not jump into the breach if the price was an artificial speculation-driven thing but it turned out the oil market is less efficient than it ought to be.

So now we have a depressed global economy. Miles driven are down. Industrial production is down.

Why is oil $86 a barrel?

Speculation?
Peak Oil effects?
Actual supply shortages?

[Klukie]

1. I was wondering the same thing

[notadmblnd]

2. They are saying demand is up.

People are probably ordering their heating oil for winter and they want to capitalize on it. I figure that it will go up all winter.

[NickB79]

3. Because the US dollar's value has dropped like a rock

And oil is purchased with US dollars.

And don't forget that Chinese and Indian oil consumption has been booming thanks to their economies growing at 10%/yr despite the recession, offsetting some of the drop in US oil demand.

[independent_voter]

6. +1

just another dividend of free trade and globalism

[Kurt_and_Hunter]

9. The dollar's recent drop was from a high level

The dollar today is actually higher than it was exactly one year ago. There was a run-up in the first half of 2010 and we have sunk back from that.

I don't know that currency effects are sufficient explanation, but the combination of currency effects and a slight global rebound might account for it.

[ProdigalJunkMail]

25. DING DING DING... n/t

[WinkyDink]

42. We spent post-WWII telling other countries they should strive to be like us. China listened.

[harun]

45. Correct and they very rarely mention this as the reason.

They being Corporate Media.

[leveymg]

4. Global demand is up.

The Asian producers are cranking out plastic shit almost at the pre-Wall Street crash rate. Much of the rest of the world, particularly Germany, are seeing record exports of capital goods to Asia and developing countries.

It's really the US and UK that are in a jobs and small business recession at this point.

[Hannah Bell]

7. 20% unemployment in spain, etc. i don't think "most of the world" is seeing record exports.

[leveymg]

10. EU isn't really an integrated economy - it's a trade bloc with sick and healthy members

and a common currency. Sorry, didn't mean to imply that the entire EU is doing great. It's not - just some countries, and more specifically certain sectors such as German machine tools.

The Asian economies have largely rebounded, at least in trade numbers. China has a growing systemic underemployment and unemployment problem, of course. Energy imports there continue to climb.

[bherrera]

33. World Economy to grow 4 % - crisis seems resolved

In Spain we have a lot of unemployment. This is in part caused by the excellent unemployment benefits, which discourage people who should be working. But the economy is not so bad as this looks.

http://imarketnews.com/node/19115

Above link shows the EU economy will grow in 2010 by more than 1 %.

The IMF suggests the world economy will grow more than 4 % this year:

"The IMF said the euro zone's sovereign financing problems and resulting financial market turbulence were significant challenges, especially with the web of financial and trade links connecting Europe to the world. However, a double-dip world recession was highly unlikely. The fund raised its 2010 global output forecast to 4.6 percent from 4.2 percent in April's review of the global economy, but kept its 2011 view unchanged at 4.3 percent."

Maybe it is good for some of you to learn to use the Google and research topics, instead of having reflexes to blame this or that, without knowing the facts.

[hendo]

37. Thank you for the great contribution

people tend to jump to conclusions a lot here.

[Kurt_and_Hunter]

30. See post #28

[pampango]

5. Part of it is that the dollar has lost value so oil seller want more dollars for each barrel

to make up for the fact that each dollar is worth less. I often hear that on the days that the value of the dollar goes down, the dollar price of oil goes up and vice versa.

[bemildred]

8. That stuff about markets being rational is all bullshit. nt

[bherrera]

34. Markets are more rational than communist command economy

Markets are not 100 % rational, but they are more rational than a communist style command system, which has been shown to lead to economic misery, poverty, and lack of economic freedom.

[hendo]

36. +100

Too many people here worship communism as though it was actually a good thing.

[Greyhound]

43. "Communist command economy" is an oxymoron. n/t

[bemildred]

47. Dogmatic babble won't get you far.

It is certainly true that command economies are too rigid and maladaptive, but that is precisely the point, rationalized economies don't "work", good economies just "grow"; but that is irrational, the invisible hand is a fool; what is required is careful, thoughtful regulation, like a good gardener tilling his crops, pruning here, fertilizing there, to make the market serve the long term interests of society.

[Selatius]

48. You don't have to be a communist regime to have a total command economy. Talk to Adolf Hitler.

More to the point, though: I don't believe anybody here is advocating that we answer the problem like Joseph Stalin.

[JVS]

49. "lack of economic freedom"

:eyes:

[Statistical]

11. Fed is pumping out dollars like they are candy....

to ease business conditions and help the recovery. In doing so it devalue the dollar. As each dollar is worth less (not worthless yet just worth LESS) it takes more dollars to buy the same commodity. There is no free lunch in economic. You can inflate your way out of a problem but there is a cost and rising oil prices is part of that cost.

Also on a longer trend we are approaching peak oil. It is entirely possible that 2008 was the peak and production will never exceed 2008 levels. As supply of available oil slowly declines it becomes a questions of "who wants it more" and the answer to that is whoever is willing to pay the most.

Lastly it is all reletive expectations. While the economy is crappy it is better (especially in other countries) than a year ago. Demand for oil is rising (oil consumption for first half of 2010 is more than first half of 2009)

[L0oniX]

13. Growth in all forms is unsustainable with finite resources.

[Kurt_and_Hunter]

15. That does not sound right to me

1) The dollar is not particularly devalued recently. It is lower than it was last summer of 2010 but is higher today than it was in October 2007, October 2008 or October 2009.

2) A devaluation issue would be broadly inflationary but the price run-ups are concentrated in oil and food while there is almost no inflation at all in the broad economy.

[Statistical]

18. Inflation is rarely even. Pricing power is important.

Say producer COST goes up evenly. Will all producer be able to push that cost on to the consumer?

If you answer no well that is right. The more necessary the commodity the more likely that price can be passed on.

Gasoline
Other forms of energy
Food
Medical Services

that would be something most people would consider essential right. Hence they will bear the brunt on inflationary pressure.

I can put off buying a new car. I certainly can put off a vacation or new TV. I also have the option to trade-down. I need a better car but I buy a used one for example. If my budget is hurting I can cut cable or get cheaper cellphone plan.

However somethings are very inelastic. I must eat. If I don't eat roughly 500K - 700K calories a year I will eventually die of starvation/malnutrition. If food or gasoline prices rise 20% I really have to accept that. In return I will make cuts on more elastic purchases. Hence I may cut my cable even if the price doesn't go up to pay more for gasoline.

People can make modest reductions in food or energy but that is really trading around the edges. This gives significant pricing pressure and inflation will be focused in these hostposts.

Eventually you are right if you get runaway inflation (5%, 10%, 15% over course of multiple years) then it starts to lift all prices.

[hendo]

39. +1000 NT

[Andy823]

12. Well...

I think it can be summed up in one word, GREED!

I agree with the poster who said people are buying heating oil for the winter as one factor. Diesel has been about the same all summer, but it just took a big jump UP in my area. Gas has gone up 8 cents or so a gallon even though the price of oil is about the same as it was during September. I think speculation has a lot to do with it, and if they can manipulate prices to stay up long enough, then sell, they can make millions! Even when prices for oil dipped down into the mid 70 dollar range, the price of gas never moved around here. Now that they have managed to get back up in the 80 dollar range, gas has gone up. This is one area I think really needs more regulation to prevent speculators from driving the prices up, and they do it all the time. Until something is done to prevent speculators from manipulating prices, oil will keep on going up and down for no obvious reasons and gas prices will stay high.

We need a big push for cheap alternative fuels so we no long have to rely on oil, and we need to make sure that there are regulations to keep renewable sources from being manipulated the way oil is!

[GSLevel9]

14. lol... because there's an election in 3 weeks? nt

[deaniac21]

16. The federal reserve, by keeping interest rates low, has devalued

the dollar 8% in th elast quarter. This affects the price of all imports.

[CanonRay]

17. 'Cause BP et al like it that way?

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

[jdlh8894]

19. Why is gold over $1300/oz?

Why is milk $3.00/gal? and on and on and on...........

[Enthusiast]

20. Because Democrats are against

the only solution and that solution is: "Drill baby, drill!" And the election. :sarcasm:

[hunter]

21. The price will go up if the economy improves...

...which will drive the economy back down again.

How bumpy will the ride be after you've fallen asleep and driven off the road?

Who knows? Maybe you just spin out in the dust, maybe you go careening down the rocks and over the cliff, maybe you hit a telephone pole.

We shall see.

[safeinOhio]

22. It has nothing to do with "supply and demand".

The true rule of capitalism is "what the market will bear". If you are willing to pay it, they will charge it.

[Statistical]

26. That is supply and demand.

If demand remains strong then consumers are willing to accept that price.

The point is although we may complain about gasoline (for most people and economies are built on the "most"). The difference between $3 a gallon and $2 a gallon isn't material. While $2 is "nicer" as a consumer. The $1 per gallon isn't enough incentive for most consumers to radically change their consumption.

The "Supply" in supply and demand isn't ever absolute supply it is the supply the seler is willing to part with at any particular price.
Now if gasoline became $10 a gallon, or $15 a gallon, or $20 a gallon it would require a radical change in consumption. Gasoline would become a niche product (for places where nothing cheaper works).

Right now an electric car is "cool" but the ROI is very low. "Maybe" you break even after 5 to 10 years, maybe you don't. Not much reward for the risk.

Just because there isn't a 1:1 relationship between a relatively small price range doesn't mean there is no supply & demand at work.

[Romulox]

51. No, it's only the "demand" part. Supply is manipulated independent of demand.

You know, by the price fixing oil cartel known as OPEC?

Economic analysis seems greatly weakened by ignoring of such basic (if inconvenient) facts, such as the influence of OPEC on oil prices.

[leeroysphitz]

23. The invisible hand of the market seems to work like a charm when the price is fluctuating upwards.

Not so much when it's time to fluctuate back down.

[lonestarnot]

24. They has to raise price to pay for all those nutbagger commercials.

[Drale]

27. Theres a simple reason

because that is around the price they can charge where its not to high for everyone to start really complaining and protesting. So basicly because they can.

[muriel_volestrangler]

28. World consumption forecast at 86.37 million barrels per day

http://www.thestreet.com/story/10886346/1/crude-oil-to-decline-fourth-quarter-outlook.html?cm_ven=GOOGLEN

which is more than it was in any year up to and including 2006: http://www.indexmundi.com/energy.aspx

So a highish price isn't that surprising.

[Kurt_and_Hunter]

29. True, but is production way down? (Oil was around $50 throughout 2006)

The dollar was worth roughly 1.30 euros throughout 2006 and oil was about $50 a barrel.

The dollar today is 1.40 euros, so currency devaluation probably accounts for less than 10%. I'd think oil should be in the $50-$60 range.

Did the economic collapse lead to cuts in propduction and exploration in 2009 that result in reduced supply in 2010?

[Statistical]

35. Of course it did. How much well we won't be able to see except in hindsight.

Wells continually deplete. From the day they begin production their output slides. Near end of life output by decrease by as much as 20% per year.

Think many oil companies were building new wells to replace older wells going into terminal decline? With oil at 30 pb? With huge econimic uncertainty? With cost of borrowing at 30 year high?

Why?

They sat back kept only the projects they were fully commited to, scaled back everything else and waited for prices to recover. Now today lots of exploration, and drilling is going on bad news is it take 3-5 years to get a well online. That is going to create supply pressures.

The bad news is we can only see this in hindsight because those details are confidential. However if we see economic activity in 2011/2012 reach 2008 levels but oil production to remain below that we are witnessing a production gap and that will force prices higher (much higher) and very rapidly.

[bherrera]

31. Oil Demand is up, US dollar is losing value

Economic growth is up, very few countries have negative GDP, some have very strong growth. This increases demand. The oil price you quote is in USD, but the value of this currency is down. For example, against the euro the dollar has lost 10 % in less than 2 months. We Europeans do not see the price increse, because to us it is only equal to $77 per barrel.

Peak oil effects are not so significant yet, because the OPEC cartel has excess production capacity. If Saudi Arabia sees the price go up, it will pump more oil.

[Dreamer Tatum]

32. Weak dollar. QED, nt

[SoCalDem]

38. ping pong

trading.. I saw it explained the other day on CNBC.. Really fast computers "playing" the market & "owning" stocks for milli-seconds sometimes.. These computers scan for drops in price, scoop them up and then resell asap...no humans needed:(

http://www.benzinga.com/10/10/507664/11-long-term-trends-that-are-destroying-the-u-s-economy-a-little-bit-more-every-single-

[LostinNY]

40. AAA

Sorry I don't have a link but AAA said the other day that we are all due for a $.40 gas tax increase. WTF? I pay a huge gas tax here in NY already. I was ready to buy a Prius but a friend of mine had a headlight go out and to repair it that had to remove the bumper and it took a long time which meant high labor cost-- $535 for a broken light bulb! And my friend is mechanically inclined so I don't think he got ripped off.

[B Calm]

41. Greed. . .

[demodonkey]

44. ELECTION. With Democratic Party control at stake.

Oil prices, gasoline, heating oil, etc. went DOWN before elections when Dubya was in the White House.

[wishlist]

46. It's become an investment vehicle and a speculative commodity, not just fuel

With interest rates so low and stock market in general so lackluster, many investors have invested in oil and gold and other commodities as a speculative investment, skewing the traditional old supply and demand relationship.

[Romulox]

50. Oil prices are set by a price-fixing cartel. I hope this helps.

Unrec for blithe ignorance of basic fact. :shrug: