9/29/2004

Has Oil Prices reach the All Time High?

On September 28, 2004 the price for a barrel of oil reached and passed the dreaded $50 mark. The price hit $50.47 in New York crude futures. The question is will it go any higher and what is the outcome? On the 29 of September, the prices fell on average of $.80 for a barrel, but I believe the price will go back up. One of the largest suppliers of crude oil is Nigeria. Their country produces 2.3 million barrels per day. Recently, there is a fear from rebels saying they would start war with Nigeria unless some agreement can be made. If the war is started then we will see a large increase in the price of a barrel of oil. Many believe the price will soon push through $52-$53 a barrel. In the micros, this will have a large effect on many businesses. One in particular is the transportation business. Shipping cost will go through the roof and people will not buy as much because of high costs. I believe this will slow down the economy of the United States immensely.

5 comments:

John West said...

There is no doubt that high oil prices have a ripple effect on the United States' economy. It makes trucking companies charge more to ship goods, which in effect creates higher prices for goods. The United States needs to start looking strongly into other areas.

Dr. Tufte said...

Oil prices are funny, and it's nice to see someone thinking about issues other than the sky-is-falling.

And ... believe it or not ... this relates to the concept of identification, as discussed in Chapter 4.

Any time there is a price rise, you need to ask if it is being driven by demand shifting to the right, supply shifting to the left, or some more unusual combination.

With respect to oil there is a knee jerk reponse that it is always the latter; largely because it has always been the latter in the past. But, that isn't a good excuse for not thinking things through.

In this case, there seem to be 3 forces pushing oil prices higher. One is that the worldwide economy is having its best year since the early 1970s. So, that will shift demand to the right. The second is the increased risk associated with the situation in Iraq. It is perfectly reasonable for buyers to bid up prices of oil now if they are worried about it going higher later. So again, a demand shift. Third, there has been some political instability in important producers - Nigeria somewhat, and Venezuela more seriously. That could lead to a leftward supply shift, but it will probably also exacerbate the risk issue.

Add to this the fact that we haven't built a refinery in this country in almost 30 years. That alone will tend to make supply more inelastic. On top of that, there are different grades of oil. American refineries are running near capacity, but are geared towards processing "sweet" crude oil. They can retool, but this takes time - and no one will even consider that unless there is some excess capacity (which, of course, there isn't). Unfortunately, a lot of the increase in wellhead production is "sour" crude oil, which is much more reasonably priced, and which could easily be dealt with if spare capacity existed.

Isaac said...
This comment has been removed by the author.
Isaac said...

Dr. Tufte mentioned the fact that there hasn’t been a refinery built in this country for 30 years and that demand is inelastic. He couldn’t have been more correct. Given that I can look back over the last 4 years, I can see that oil is completely inelastic. Current prices of oil are above $100 a barrel and we are continuing to buy. We have not reached our breaking point yet and I believe it will be awhile until we will.

Dr. Tufte said...

-1 on Isaac - I'd already counted the withdrawn comment.