This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
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.
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2 comments:
-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.
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?
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