Tuesday, November 15, 2005


"...perhaps in the absence of hurricanes and other phenomena that shift the demand for oil upward, prices naturally drop," said CF yesterday as she pointed out a trend we are all seeing at the gas pump: prices are falling.

But it would be wrong to claim that this short period is indictive of a larger trend, just as pundits were wrong when they screamed doomsday only a few months earlier as gas prices rose. What is causing oil prices to fall now is the result of a game of catch-up. It takes a good six months for petroleum to go from ground to gas station. Even though oil companies pumped more oil when gas prices started to rise, we are now only seeing those benifits; supply is merging with demand.

It's true that prices naturally drop, but we have to look at a much longer time period. Check out this graph from wtgr economics.

Note that oil prices were falling for about the fifteen years before the creation of OPEC in 1973 and have been stochastic ever since. A non-market organization made prices flucutate, it seems, not the market itself.

Consider now the role of tar sands and oil shales, two sources of oil the industry didn't consider profitable until not too long ago. The former source is pretty evenly split three ways between the Mid-East, Venezuela and Canada and makes up about 2/3 of the oil reserves in the world. The latter is mostly in the US--1.2 trillion barrels worth. Oil companies are extracting or planning to extract oil from these sources, a process that becomes more worthwhile as prices and volatility rises. As this production increases, OPEC will become less significant and prices will then follow the trend we saw in the pre-OPEC days. Imagine a newspaper headline in the year 2025 reading,

"Though NA Net Oil Exports Continue To Rise, Congress Worries About Falling Gas Prices"

Fricking Gas-Tastic.

1 comment:

Jacob said...

I heard an interesting bit of trivia in one of my classes the other day. The synthetic processes available to turn coal and water into gasoline start to become economically feasable at around $55 a barrel. And we've got plenty of coal, as does China.

Just some trivia for you.