3/15/2005

Is Oil Really in Short Supply?

Oil prices have been increasing drastically over the past year. Some critics argue that oil is in short supply, and that is why prices are so high. Others, however, claim that oil producing nations create the shortage. They always seem able to produce more oil when they claim that it is in short supply. According to the article "Time for OPEC to plump up its cushion", oil producing nations in the middle east found new oil supplies, or else prolonged the retirement of current oil wells. If this is true, then they are producing more oil than we think. With summer just around the corner, and oil prices on the rise, we can look forward to gasoline prices well over $2.00 per gallon. If OPEC puts a cap on oil prices, the price could remain low, but supply will dwindle. In my opinion this would increase prices as well because of the shortage. Americans are using so much fuel to operate their hummers and suburbans, that the price will remain high. If these nations really have more oil than they say, we could see a decrease in price. But if consumption remains high, so will fuel prices.

8 comments:

Dr. Tufte said...

-1 on Rico's post for poor capitalization.

This is one of the better posts by my students about why gas prices are "high". The "high" prices are really driven by consumption, not a shortfall of production. However, most of that consumption is going to produce goods, not to tool around in Hummers.

Most of the Middle Eastern oil producers are running near capacity. Iraq is an exception to that. A bigger problem over the next decade is that Venezuela, Nigeria, Iran, Indonesia, and Ecuador - all serious oil producers - are each suffering from political problems that prevent them from ramping up their production.

Two additional problems are the grade of crude oil that is coming out of the ground, and the environmentally-driven inflexibility in our refining industry. Lower grades of crude oil are actually selling right now at prices that are near record lows (yes, you read that correctly). As to the refiners, they can process that sort of stuff, but their real cost is in switching from one grade of oil to a different one. Some more excess capacity would solve that problem - but no one wants to live near a refinery.

Vincent said...

Good Blog, But I disagree I think we will see a reduction in gas prices in the short-term. OPEC met in Sfahan, Iran on the 15th of March and according to the New York Times: “raise(ed)… (OPEC’s) quota in two steps by as much as a million barrels of oil a day -an immediate 500,000-barrel-a-day increase followed by an option to increase by another half a million barrels by May." So in by raising the quota this will also increase supply thus lowering the price. OPEC is looking to maximize revenues long-term and will continue to do so unless pressured by oil consuming countries to increase output much like we saw in Iran on Tuesday. The summer season is the big driving season for the U.S. and isn’t it a coincidence that OPEC increases supply right before the summer giving OPEC a chance optimize revenues during summer’s peak driving months without feeling pressure to increase supply again.

Vincent said...
This comment has been removed by a blog administrator.
Nick said...

I agree completely with this post. OPEC is just doing what every business wants to do drive there prices higher to earn more profits, and we are willing to pay those prices. I don't think that gas prices will go down anytime soon.

Ralph said...

Consumption will remain high and so will fuel prices. What alternatives do we have to the oil-based consumption? Companies are making alternative fuel based vehicles, and have had increasing success with them. Sales of hybrid gas-electric cars in the US doubled last year according to industry analysts JD Power. A total of 85,699 sales of seven different models were recorded in 2004, up 97.3 per cent from the 43,435 sold in 2003. But 85,000 hybrid cars is not going to offset the millions of oil based vehicles in the country. Until the alternatives play a bigger part in the US, demand will only get larger.

mushroom club said...

there are a lot of factors why oil prices are higher

first
production problems in iraq and cival problems in several more oil producting countrys have cut a little into production

second
large increased demand from china for crude oil

thrid we have a deadduck presedent who owes big time favors to big oil and the saudi goverment as they bailed him out of several failed oil compays before he became presedent which is also why nothing is being done about oil companys making record profits

all of this has not made oil in short supply but has normal excess the world normally has has been reduced signifinity and that fine with opec and big oilas it a creates a vaild need to raise prices and profits

Anonymous said...

There's a fascinating article, 'Is 'Peak Oil' A Scam? Oil Fields Are Re-Filling Naturally And Rapidly', on the 'Current News You Need To Know' page at SurvivalistSkills.Com.

Makes for interesting reading!

Dr. Tufte said...

Without showing any support for the bizarre survivalskills.com website, let me note that the linked article was originally published in the respected legacy media outlet Newsday. It refers to the well-known, but poorly accepted idea, that many underground reservoirs of oil appear to be refilling from below. The big question is still why?