Why are they so low?
Gas prices
- Thread starter vraiblonde
- Start date
Tilted
..
Which version of the answer do you want? The single sentence version, the single paragraph version, the single page version, the single chapter version, or the comprehensive book length version?
Larry Gude
Strung Out
The US and Saudi are colluding to exert some influence over naughty Russia and naughty Iran.
itsbob
I bowl overhand
Saudi is flooding the matket.. driVing prices down. Killing economies that depend on high $ oil.. it also takes fracking and the Keystone pipeline (tarsands) off of the table because its no longer economically feasible to fracking on process tar sands.. once enough refineries are gone and Saudi can again Control the market they'll cut us off and the price will skyrocket.. we'll be dreaming of the days of $4 gas..
SG_Player1974
New Member
Question I have is why there is a $.25/gallon difference between SOMD and places like Waldorf, Annapolis, etc.
Was up Annapolis way about a week ago and it was around $2.20/gallon.
Was up Annapolis way about a week ago and it was around $2.20/gallon.
Thumbnail sketch in layman's terms.
Good Question. Maybe local taxes? Greedy local supplier? Does anyone Know?
Amused_despair
New Member
The Saudi's are dumping on the market to drive prices down in a n effort to remove competition from the market. it is the same thing they did in the 1980's when they tried to cripple Iran and ended up crippling US oil production. There were massive layoffs in the oil industry in the US in the mid west, Colorado was devastated.
Larry Gude
Strung Out
Yeah, those dumb Arab's They've had us doing their bidding for decades now and, this last episode, even have us doing all the bleeding AND pay for it.
Dumb.
Tilted
..
Okay, let's try to run over the basics.
For various reasons, oil prices can be quite sensitive to small fluctuations in the supply-demand balance (*). Seemingly small differences in that balance (e.g. demand, supply, or both being above or below some baseline) can cause large differences in prices. For good reasons, its pricing sometimes behaves very differently than what we expect from many other kinds of products. (I'm happy to go into the main whys of that if you're curious.) Further, over any sufficiently long period of time (e.g. 6 months, a year, 2 years) oil pricing has to resolve or average out, so to speak, to whatever the supply-demand realities are for that period of time. (Again, I'm happy to go into the whys of that if you're curious - but it's a basic physical reality of this market.) However, oil pricing at any given moment is largely speculative. It reflects the markets' collective expectations for future (fairly short-term) supply and demand, weighted for various risks that the markets appreciate. That means oil pricing is, looked at at given moments rather than over a long enough period of time, often wrong. That is to say, markets guess wrong and the price doesn't accurately reflect the magic number that's needed to keep supply and demand in balance (i.e. suppress consumption and encourage production enough, or vice versa, such that consumption and production are rough equal). When this happens, and the mis-pricing becomes clear, that pricing has to correct. Further, because of what I suggested before - that prices over longer periods of time necessarily have to be 'correct', sometimes pricing has to overcorrect to undo, so to speak, the supply-demand effects of it having been misplaced in the other direction for a while. That's the background understanding needed to get what's happening now.
Well... some time ago oil prices were, we realize now, higher than they should have been. Markets had priced in geopolitical concerns over supply disruptions that, as it turned out, didn't materialize. Global economies - most everything that matters, aside for the U.S. - have continued to stagnate, perhaps more so than was expected a year or two ago, meaning global demand hasn't increased as fast as might have been expected. Higher priced oil has led to the development of new supply, e.g. from shale deposits, faster and on a greater scale than had been anticipated. Those things, and others, have meant that oil was priced higher a year or 6 months ago than it needed to be - than the magic number, as I called it before, would have been. When this became apparent, when we realized we were (or would be) producing more oil than was being consumed at current prices, oil prices started to correct. And since the mis-pricing had persisted for a while, they arguably went on to overcorrect.
Under different circumstances or at a different time, OPEC likely would have stepped in and stabilized falling prices by cutting production (or, at least, announcing that they were going to cut production). To some extent that was expected this time around, but the likes of Saudi Arabia and the UAE were apparently able to convince the more jumpy members of OPEC to play the long game. That is to say, they decided not to cut production and to let the tumbling oil prices punish some of their newer competition - production that isn't as viable at lower oil prices. OPEC is trying to protect its market share and its control (whatever it has left) of pricing, and it's willing to endure lower oil revenue over the near term in order to do that. It isn't a surprise that Saudi Arabia, e.g., would take that tack, it's in good enough economic shape to play the long game. But it is a bit of a surprise that some of the other members of OPEC, who aren't in as good a shape, would go along. Then again, maybe they realized that the likes of Saudi Arabia and the UAE might just unofficially make up whatever supply they all collectively agreed to cut in order to keep prices falling anyway. So they had no choice but to go along? What Larry suggests - about punishing / exerting control over Russia and Iran - is an additional benefit that likely factored into the decision, but I don't think it was the primary driver of it.
The point of OPEC's decision, its inaction in the face of falling oil prices, is to destroy the last half million barrels per day of production that the world might have been producing a year from now. A key thing to understand about the global oil market is this: Thinking of it in nice round numbers, as a 100 million barrel per day pie, it doesn't so much matter what it costs to produce the first, say, 98 million barrels. Much of that can still be produced very cheaply. What matters is what it costs (or would cost) to produce that last million or two barrels. Oil prices are determined at the margins of supply and demand. And we're seeing quite a bit of evidence that what OPEC is doing, or not doing, is working. There's little question that some oil that would have been being produced a year from now had oil prices remained high, now won't be. I still think that total U.S. production, e.g., will increase over the next year. But it won't increase as much as it would have, and that's the point.
Anyway, there's some oversimplification in there and I've left some aspects of the situation out. But I think that's a fair gist of what's going on and has gone on. Hopefully I didn't run on too long.
I've got some other thoughts I'll try to share after I get back from playing golf. If you have any questions, I'll try to answer them then.
Tilted
..
They know what they're doing.
Yes, as prices go back up some of whatever production would have been lost will return (and as I said in my reply to vrai, I think U.S. production will continue to grow even with lower oil prices, it just won't grow at the rate it would have with higher prices). But a message will have been sent and a lesson will have been learned, the vulnerability of investing, going forward, in marginal projects - those where the risk weighted expected return is comparatively small - will be more palpable. Some projects, some wells, won't get green lighted as a result of what's happening now, even when higher prices return - projects and wells that otherwise would have been.
Additionally, OPEC may not let prices get quite as high this time around. They may decide that $90 is the right price rather than $100 or $110, that will also have a small effect on how many wells get drilled. Further, even if prices go back to where they were, projects and wells will already have been lost - a year or two or three will have been lost. You don't just wake up one day and say, oil's $100 again, start the extra pumping (well, not unless you're OPEC
). Those kinds of things, and the capital investments that facilitate them, take some time.We are already seeing major announced cutbacks in capital expenditures for new projects and wells next year. We're seeing announced cutbacks in drilling rigs that will be in the field. We're seeing large declines in new well permits. We were seeing some of this stuff back when oil was still in the $70s. Again, compared to total global oil production we're talking about a very small portion of it being lost. But that small portion matters when it comes to pricing dynamics. Oil prices are determined at the margins - at the margins of supply and at the margins of demand. And oil prices are highly inelastic.
The price drop is explained in its most simplistic form: too much supply. It is that simple.
The world is producing about 1.6 million barrels per day more than we are using. Demand growth is much slower than expected.
One of two things will happen over the course of the next 6-18 months...either demand will increase to match supply and prices will go back up or supply will fall to match demand and prices will go back up. In the meantime consumers will experience a nice bump in their disposable spending.
Enjoy it while it lasts.
The world is producing about 1.6 million barrels per day more than we are using. Demand growth is much slower than expected.
One of two things will happen over the course of the next 6-18 months...either demand will increase to match supply and prices will go back up or supply will fall to match demand and prices will go back up. In the meantime consumers will experience a nice bump in their disposable spending.
Enjoy it while it lasts.
Hijinx
Well-Known Member
They know what they're doing.
Yes, as prices go back up some of whatever production would have been lost will return (and as I said in my reply to vrai, I think U.S. production will continue to grow even with lower oil prices, it just won't grow at the rate it would have with higher prices). But a message will have been sent and a lesson will have been learned, the vulnerability of investing, going forward, in marginal projects - those where the risk weighted expected return is comparatively small - will be more palpable. Some projects, some wells, won't get green lighted as a result of what's happening now, even when higher prices return - projects and wells that otherwise would have been.
Additionally, OPEC may not let prices get quite as high this time around. They may decide that $90 is the right price rather than $100 or $110, that will also have a small effect on how many wells get drilled. Further, even if prices go back to where they were, projects and wells will already have been lost - a year or two or three will have been lost. You don't just wake up one day and say, oil's $100 again, start the extra pumping (well, not unless you're OPEC
We are already seeing major announced cutbacks in capital expenditures for new projects and wells next year. We're seeing announced cutbacks in drilling rigs that will be in the field. We're seeing large declines in new well permits. We were seeing some of this stuff back when oil was still in the $70s. Again, compared to total global oil production we're talking about a very small portion of it being lost. But that small portion matters when it comes to pricing dynamics. Oil prices are determined at the margins - at the margins of supply and at the margins of demand. And oil prices are highly inelastic.
Good Posts, and of course we know that many of the projects that were in planning will be dropped, it will set back many barely profitable companies.
Damned shame the Saudi's have such a power over the planets resources.
I believe this country has awakened them a bit with our potential, perhaps they will settle on a more stable price.
It appears to have harmed Russia much more than it has harmed us.
We must remember that the potential still exists, and hope the Saudi's remember it too.
Larry Gude
Strung Out
Hello????? Is this thing on???? The American working man, soccer moms, are benefiting, HUGELY from this. Are you freaking kidding me????
Right?
The only thing I understood of that is that prices were too high, and now they are correcting. Tilted, is that the gist of it? I don't really understand oil politics and why it doesn't follow the rules of supply/demand like other products and services.
I'm going to be dumb here because I sincerely do not understand it. Is it similar to a clearance sale, where there was too much produced and no viable means of storage, so they cut the price to get people buying?
May I have the single sentence version?