How To Impact The Price Of Oil


The price of oil fell yesterday.  In fact, it fell to a recent low after losing about 6% of its price in a single day.

A single day.

A new find?  A long term commitment from OPEC to increase production?  An announcement from Venezuela that it would end its gasoline subsidies in that country to ease demand and therefore apply downward pressure on prices?

Nope.

None of that.  In fact, it was a simple single one day event.

The price of oil fell because:

(Reuters) – Oil tumbled 6 percent on Thursday to a four-month low after the world’s top consumers released emergency oil reserves for the third time ever, a surprise intervention to aid the struggling global economy.

Huh?

No new find?  No political condition that would signal a long term impact to the market?  Nothing?

The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve — the same quality that markets have lost due to the Libya disruption.

I still don’t understand.

The relatively small amount of oil we are losing due to the conflict in Libya caused the price to rise?  And then, when we make up that loss, the prices go down?

But we’re told that no amount of US oil production could have an impact.  And yet, when an amount of oil much MUCH smaller than increased US production calls for, prices react.

Strange thing that market.  Strange indeed.

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16 comments
  1. Alan Scott said:

    Not to give President Obama credit , but I wonder what took him so long . Hedge fund speculators have been buying up and storing oil for months . I said, somewhere, that if Obama had half of a brain he would release oil and burn the speculators . If he had done this 4 months ago he would have prevented the terrible last quarter the economy just had . Funny how stupid Liberals are . More supply ,cheaper oil, more economic growth . Better late than never . Now if they would only let us drill .

    In the short run this drove down the stock market because hedge funds must raise cash by selling stocks to cover their oil margin calls . Barring a Greek or US default, cheaper oil should make the US economy perk up .

    • pino said:

      More supply ,cheaper oil, more economic growth . Better late than never . Now if they would only let us drill .

      And that’s the point.

      If we allow drilling, we’re sending the signal that “the hounds of war” have been released and folks will think we’re gonna start aggressively looking for more energy.

      The price will adjust for that.

      Just like it did for a 1.5 day supply of oil.

  2. A couple of points: nobody would argue that increased production won’t decrease the price of oil relative to what it would be without the increase in production. The problem in the US is that even if we drilled everywhere we could in Alaska and off shore, it would have only a minimal impact on long term supplies. I think natural gas finds in recent years in places like Pennsylvania are likely significant, but unless there is an unexpected oil source (the last major find was in the 60s) increased drilling will not alter the long term trend of oil resources declining (as current reserves are used up) and price rising.

    Alan, why do you have to say “funny how stupid liberals are” are a kind of mass insult against anyone who doesn’t agree with you? Release of oil from the reserves is controversial, and opposed by many conservatives. Their argument that this reserve is not to impact the economy, but to be used only in an emergency (a major accident threatens supplies). In fact, a cynical conservative might say this is designed to stimulate the economy going into the 2012 election (which may in fact be true, at least in part!) I mean, our problems will not be solved by liberals or conservatives getting their way — neither side is strong enough to do so. Solutions will come through compromise and the two sides problem solving together. Insulting each other isn’t a good way to do it.

    • pino said:

      The problem in the US is that even if we drilled everywhere we could in Alaska and off shore, it would have only a minimal impact on long term supplies.

      That’s the point:

      Prices jumped when Libya experienced a decline in its production due to the violence. And that prices dove 6% when we released a single day and half of oil. If prices are going to react to such small and immediate impacts, I argue that the price of oil will decline rapidly if we announce that we are going to begin aggressive exploration and extraction.

      • There would be sometimes dramatic short term fluctuations, but supply and demand is a pretty harsh and unforgiving law.

      • pino said:

        There would be sometimes dramatic short term fluctuations, but supply and demand is a pretty harsh and unforgiving law.

        I very much agree. But remember, a large % of these “speculators” are Southwest Airlines, FedEx and even AT&T [they drive more miles per day than UPS]? These companies are not looking to profit on oil, they are looking to make gasoline more predictable. As such, they try and read the tea leaves. If Libya interrupts oil today, it may stay interrupted, and that’s what they’re betting on.

        So, if the US sends the signal that we’re going to be aggressive in finding new energy deposits, oil too, the speculators will take that as a signal, and buy down gas.

  3. Alan Scott said:

    Scott ,

    ” Alan, why do you have to say “funny how stupid liberals are” are a kind of mass insult against anyone who doesn’t agree with you? ”

    That is exactly the way I meant it . For years I have observed the way green liberals keep blocking the paths to all energy solutions . All of this to prop up ” Green Energy ” which is the second greatest scam after Global Freaking Warming . I came to the conclusion that anyone who is green is merely an Anarchist. They are for whatever solution that does not work . If by chance one of their ” Green Technologies ” would actually work they would turn against it . They want confusion, chaos, riots in the streets, discontent . It’s how they get power . Al Gore is the poster child for it .

    ” on won’t decrease the price of oil relative to what it would be without the increase in production. The problem in the US is that even if we drilled everywhere we could in Alaska and off shore, it would have only a minimal impact on long term supplies ”

    That is totally false . Thanks to the new drilling techniques US oil and gas production is going up , in spite of everything the Democratic Party can do to stop it . If these stupid clowns would just get out of the way , a good chunk of the money going to the middle east would stay in America . Prove me wrong !

    • Remember how conservatives opposed the Kyoto accords saying it would savage the economy? Yet the EU chose to abide by them, met the goals, and now countries like Germany are doing better than the US. Also, by moving ahead of us in green technology, they are poised to be a market leader as China realizes its levels of pollution harm the country. Moreover, I’ve never heard Democrats say there should be less oil production, President Obama has even approved more drilling. Many Democrats want that. My information on the amount of oil available that you dismiss comes from a Republican fossil fuel geologist I happen to know. If you look at total oil reserves in Alaska, the math shows it won’t alter the basic structure of world demand.

      Total proven US reserves is 21 billion barrels. Let’s take the most optimistic scenario of total technically recoverable oil reserves, which is 136 billion barrels. That sounds like a lot, but technically recoverable means some of it is very expensive to get at, or perhaps would be in locations even conservatives would not want to drill. The world uses 30 billion barrels of oil a year, so that would be enough for a little over four years (since oil is a commodity sold on the market, you couldn’t just limit it to US use unless you socialized the oil industry — do you want to do that?) Even if you did that, the US uses 6.6 billion barrels of oil a year, meaning it would at best last only 20 years. But the idea we could get at all the technically recoverable oil is not realistic.

      Oil shale is a possibility, but that is very expensive and takes a long time to get at; it would add to our reserves, but isn’t a salvation. So I have no idea why some conservatives say we can just drill more oil, and dismiss alternative energy as a scam. You do so; I won’t call you stupid, but I wish you could back up your assertions with evidence and logic.

  4. Alan Scott said:

    Scott,

    Funny you should bring up Germany , the liberals one and only success story . In fact, thank you for the opportunity to vent . But back to Germany . Germany’s economic success has to do with Government , labor and industry sitting down together about 6 years ago and mapping out a plan to be more competitive internationally . Energy has nothing at all to do with it . In fact they are just about maxed out as to how Green energy they can subsidize and integrate into their grids . And their decision to shut down their nuclear plants in light of the Japan disasters means they now have to replace millions of kilowatts of capacity . Guess how they will do that ? First they will make France happy by buying more power from French nukes . Second they will buy more natural gas from Russia thereby further melting the ice caps and starving the polar bears .

    Green energy will fill very little of the breech . I hope Germany and China do move ahead of us in green tech , they are our toughest competitors . Spain moved ahead of everyone in green tech and they are almost as much of a basket case as socialist Greece .

    So you never heard Democrats say there should be less production . Are you sure ? They say it in code. You know code. Anytime someone criticizes Obama, they are using code for racism. When Democrats say we can ‘t drill our way out of trouble, that is code for less production. Anytime a Democrat opposes opening areas for drilling, that is code for less production .

    We have been running out of oil since the 1920s and I can prove it . Yet we don’t . And oil is not the only thing that comes out of the ground . If Democrats do not screw it up, we now have a one hundred year supply of natural gas . And believe you me, they hate gas almost as much as oil . If Obama cared about what worked he would order his car company to scrap the Chevy Volt . Then take that capacity and start making vehicles that run on compressed natural gas . The only difficult part is the fueling infrastructure .

    Then have his EPA get rid of the restrictions that keep high mileage diesel cars from coming in from Europe . These are all things that will ‘work ‘. I dare you to prove otherwise .

    Thanks , I needed to get all of that out of my system .

  5. Alternative energy is part of their strategy. And I agree that avoiding nuclear energy is probably a mistake on their part. And you’re right that various sectors of the German economy cooperated and mapped out a strategy to be competitive — that’s the kind of cooperation that we need, one that ideological mutual demonization works against.

    I am at a loss as to why you think Democrats hate oil and natural gas. I think you’ve maybe been listening to too much talk radio. Democrats and Republicans are actually not that far apart on most issues, ideologically they are more alike than different. The extremes of each part ways, but the vast majority are towards the center.

    I’ve heard good things about the Chevy Volt, even from science folk. I’m not sure why you don’t like it. I agree that high mileage diesel cars should be allowed in.

  6. Alan Scott said:

    Scott Erb,

    I’m not used to the loyal opposition-you-agreeing with anything I say . So thank you for that . Alternative energy is just a cost they are willing and rich enough to bear . I totally agree with you that if Labor and management could get together we could compete in the international market place . Except for a few isolated industries, I do not see it happening in our Country . The left controls the labor unions and hate the corporate culture . In Germany Labor voluntarily agreed to keep their wage demands reasonable and not to strike , No way will organized Labor here , be that wise .

    I am at a loss as to you not seeing that Democrats hate conventional energy . Granted Democrats are not monolithic and have various factions . Okay a Democrat like Joe Manchin is not against fossil fuels because of his State’s coal industry . But the rest of them, come on . You have far out groups like the Sierra Club that greatly influence the Party . They loath all conventional energy and heavy industry . They wait for the next BP disaster so they can bash everyone they hate . The man made climate change fraud is mother’s milk to these clowns . Siphon off capital from American business and give it to some guy to plant a tree in Mongolia and convince idiots that this just made a difference .

    I do not see a center, except among folks who do not pay attention . Anyone fully engaged is on the ends of the rope trying to move the flag their way . Well from the 08 election until the midterms in 2010, the flag on the tug of war rope went way left . We on the right have barely inched it a little back to the right after the midterms . We are doing far far better at the state level .

    My problem with the Chevy volt is that it is merely a political creation to appease the left . No one wants it . The government has to give tax incentives to give them away . Also I’ve heard of Government fleets purchasing them from orders on high, to get the numbers of sold cars up . I can’t prove that Obama had anything to do with that, but I’m just saying ?? Take away all of the government props and if the Volt can swim on it’s own , well then God bless it .

  7. Alan, the thing is we have the weakest labor unions in the world, and except I think for Japan, the least unionized. So I don’t think they can be blamed — though I think blame may be the wrong word. We need to problem solve and as I tell my kids when they fight, stop blaming — it solves nothing. I chatted with one of my Senators last summer, a Republican I happen to support, about just that problem – she seemed to think that partisanship was hurting everyone. I also am friends with and support my Republican state Senator and Representative, even though we disagree on a lot of things. They’re pragmatic and listen to all sides and aren’t fighting an ideological war. I just think that gets more stuff done. I also think most Americans think that way — that’s why they tune out the talking heads screaming at each other on CNN or FOX.

    Energy, the environment, electric cars and getting the economy going, these are all really complex issues. Reality doesn’t follow ideological wishes, be it from the left or right. Even if we move quickly towards alternatives (and the EU not only has met the Kyoto accords goals, but plans to go beyond them, and it has probably helped more than hurt their economy), fossil fuel is still the backbone of our energy supply and we need to find ways to make sure there is a smooth transition. Moreover, oil companies like BP, for all their problems, is a leader in this regard, oil companies are not the enemy. I don’t think its wrong for government to support R&D on something like electric cars, the potential dangers of long term energy shortages are great.

    German workers have benefits American workers can only dream of. They are treated with respect, and in fact unions are presented on the board of directors of larger corporations. That also means unions read the books and know if their demands are beyond what the company can afford. They know that if the company does poorly, it will harm their workers. That sense of partnership seems to work for the Germans. However, German CEOs and top business brass are much lower paid than their US counterparts.

    I guess my point is only that ideology makes politics often more like a sports competition where the two sides go at it without regard for the truth, but for their side — be it left or right. I think that blinds people to times when they get it wrong (and both sides do), and how solutions really can only come when they compromise. I actually am reasonably hopeful Boehner and Obama will find a way to do that — I get the sense both want to.

    Ultimately

  8. Alan Scott said:

    Scott,

    Sure I can blame the unions . They have lost membership because the industries they used to dominate could not compete in the new world . That is why they moved into the public sector . Even there , finally they tax payers are electing governors who are reigning them in . Even Democrat governors who owe their souls to them are telling them they can no longer pillage state budgets . Their response in places like Wisconsin is similar to the Greek mobs rioting over their handouts being cut .

    But let us speak of BP, now that you raised it as a topic . I follow history . I tend to remember things . Up until the gulf spill BP was the Liberals favorite Big oil company . They had more green projects than almost any other evil corporation . I believe they had a Butanol plant in Britain . I can’t recall the others . That most of these never panned out is not the point . It was all about being green and buying the love of the green Marxists .

    Well BP forgot that they are an oil company . Producing and transporting oil is serious business. Safety and the environment has to have the top attention of upper management .At BP those guys were distracted . The Gulf spill was only the latest and greatest of BPs troubles .Their Texas refinery has had a “troubled” history . Their Alaska pipeline has had leaks over the years . These are not just the inevitable screw ups that happen to all big companies .

    Back to Germany. Do not look at the current German labor state and believe this has always been the case . Labor and management have been at each others throats in the past . This latest incarnation is very recent and is the result of past hard times . After a long period of prosperity , I will be surprised if the unions fail to remember what got them here and raise their demands .

    I am just the opposite on Obama and Boehner because I understand their power bases . Naturally I am biased . Boehner is perceived by his Tea Partyers as having been snookered by Obama on those last phony cuts . If it happens again Boehner will lose control of his guys ,so he won’t cave . Obama has made the political calculation that if the US defaults , the first victims , like last time , will be military families and SS receivers . He will blame Boehner . That will turn the country against Republicans and he will hold his job . This is not what is good for the country . It is about what is best for holding onto power .

  9. From a social science perspective the proposition that unions are to blame for our economic problems is very weak. That’s because we have weak ineffective unions with very small membership levels, and countries doing better than us have strong effective unions. Moreover, German labor relations have been solid since WWII. Co-determination has been around since the 1970s. Germany, like Austria and the Scandinavian countries have rejected the “class warfare” model of worker-employer relations in favor of a partnership model. It has worked well for decades.

    I think you’re locked in partisan-think, Alan. It’s easy to see one side as good and the other bad (Orwell’s ‘four legs good, two legs bad’ example). So the left thinks Obama was snookered (they do) and the right thinks Boehner was. Both sides can’t be satisfied. So Obama and Boehner have a choice: they can think politically, putting their careers and political games ahead of the good of the country, and maybe keep their jobs, but watch the US continue to decline. Or they can compromise and put their country first, even if it means losing their power. I hope they do the latter. Our system is set up to discourage any party from gaining full power and dictating terms — and the partisan split in the country now is such that it can’t happen. The choice is either compromise and solve problems, or refuse to give in while America sinks, with each side self-righteously blaming the other side.

    • pino said:

      From a social science perspective the proposition that unions are to blame for our economic problems is very weak.

      I suspect that the financial troubles of the states are much more impacted by the unions than either the private sector or the Federal government. However, look at industries and states where private unions are strong….you can see the impact.

  10. Alan Scott said:

    Scott,

    I still do not understand you . You continue to try not to take sides . I reject your pox on both your houses logic . By the way , the left was wrong , Obama won the last contest and Boehner lost . The $ 38 Billion in cuts was all smoke and mirrors . Look it up .

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