Joined: Jun 20, 2008 Posts: 67 Location: Quebec/Ottawa, Canada
Posted: Sat Jun 21, 2008 11:57 pm Post subject: For every 1% of crude demand, a 20% increase in price
"In the absence of any additional crude supply, for every one percent of crude demand, we will expect a 20 percent increase in price in order to balance the market."
So is this a 20:1 ratio of "pain at the pumps" to "putting extra time and effort into saving energy" ? I guess fossil fuel energy might still be 20 times too cheap at this rate.
Joined: Apr 09, 2007 Posts: 5354 Location: Alaska (its much bigger than Texas).
Posted: Sun Jun 22, 2008 12:44 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
The 20% increase in price for every 1% shortage in supply isn't a hard and fast rule, but a general explananation of why oil prices have gotten so high.
Commodity prices are always set at the margins.
When demand for oil exceeds the supply of oil, essentially every barrel of oil available will be priced at the highest cost someone in the world is willing to pay for oil.
Joined: Feb 20, 2005 Posts: 2691 Location: Uppsala, Sweden
Posted: Sun Jun 22, 2008 9:09 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
Google "elasticity" people.
And most importantly, elasticity for oil is radically higher over 10 years than 10 days... _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Last edited by Starvid on Sun Jun 22, 2008 9:48 am; edited 1 time in total
Posted: Sun Jun 22, 2008 9:28 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
Quote:
Google "elasticity" people.
NO!
This is the marginal price increase to crude demand/supply. At we get higher prices, then there will be less people in the market for oil and less money in the market. So at higher prices like $300-$400 or whatever, a 1% shortfall from demand or supply may only cause a 5% or 10% increase. I'm not expecting, with a 50% reduction in supply, there to be a 1000% increase for the price of oil (not including growth in demand). _________________ Riches are not from abundance of worldly goods, but from a contented mind.
Posted: Sun Jun 22, 2008 9:44 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
3aidlillahi wrote:
Quote:
Google "elasticity" people.
I'm not expecting, with a 50% reduction in supply, there to be a 1000% increase for the price of oil (not including growth in demand).
Probably not, because in that event, a world depression would almost certainly be underway.
However, could you not see a 5% difference of demand over supply producing $1,000 oil, if only for a short while? I certainly could. _________________ "It's called the American Dream because you'd have to be asleep to believe it."
Joined: Feb 20, 2005 Posts: 2691 Location: Uppsala, Sweden
Posted: Sun Jun 22, 2008 9:47 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
3aidlillahi wrote:
So at higher prices like $300-$400 or whatever, a 1% shortfall from demand or supply may only cause a 5% or 10% increase.
I guess they meant from the current level, no?
3aidlillahi wrote:
I'm not expecting, with a 50% reduction in supply, there to be a 1000% increase for the price of oil (not including growth in demand).
If we suddenly lost 42-43 million barrels per day, I wouldn't be surprised in the slightest if oil reached $1400 a barrel overnight. _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Posted: Sun Jun 22, 2008 10:58 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
Quote:
If we suddenly lost 42-43 million barrels per day, I wouldn't be surprised in the slightest if oil reached $1400 a barrel overnight.
Sure. I wasn't saying that. If we lost 42 mpd overnight, then the amount of money in the system and the desire of people to purchase oil and gas would still exist, thus allowing for these types of prices.
But we won't see it overnight. Instead, we'll see this constant rise in the price of oil (maybe) which would then slowing evaporate the US and global demand for oil as well as the economy.
Quote:
However, could you not see a 5% difference of demand over supply producing $1,000 oil, if only for a short while? I certainly could.
Yeah. Give it a few weeks though and then demand would come crashing down and the price would stabilize around $400-$500 or where ever.
I'm talking about when there is a slow increase in the price which causes the market to "correct" (ie. kill off customers, literally and figuratively) which would keep the price of oil from escalating exponentially like this. You have to think about the way the world is structured economically and financially. _________________ Riches are not from abundance of worldly goods, but from a contented mind.
Posted: Mon Jun 23, 2008 6:08 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
It is hard to draw any conclusions about the ratio between crude demand and price. The price of crude has doubled in the past year, but the IEA estimates that three-fifths of that price has been absorbed by subsidies, so the true price of crude products has not filtered down to consumers, yet. Therefore, not enough demand has been destroyed in the developing world, while demand in the OECD is falling due to higher prices.
After a one year lag the elasticity for petroleum is quite a bit higher than in the short-run where few alteratives exist. But as well higher prices have not filtered into ALL prices. For example asphalt. Roads that were re-surfaced when oil was $15-75 per barrel will most certainly cost more to re-do when prices are between $130-150. And things like tractor tyres. They may take a long-time to wear out, but they need to be replaced eventually. So those tyres may also represent $30-45 crude as well. Not so when they need to be replaced.
As far as absolute prices are concerned there are two very important facts to remember. One is that higher prices are a wealth transfer from consumers to producers. Aside from some traction that wealth is not destroyed, but re-distributed. So someone is making money from crude at $135-140 per barrel, and they are spending that money on a basket of goods and services that are produced for them by someone else thus creating employment. Unfortunately, those that are transfering that wealth might not be those that benefit from that extra demand.
Also, petroleum is the 10% of the economy that allows the other 90% of the economy to function. At $130 per barrel it is the approximately $4 trillion that helps create world GDP however you wish to measure it. So petroleum products cannot and will not cost more than the economic growth produced or the ability to pay for them. At least not in the long-run. In the short-term someone might sell accumulated assets to pay for petroleum products, but that assumes a willing buyer. In the medium time horizon we might all be working for food and fuel, but eventually that kills all discretionary spending, and therefore future demand for petroleum products.
For these reasons I would throw out any such calculations like 1% increase in demand equals a 20% increase in price. They are not historically accurate, and will not be a reliable forecast going forward as demand destruction, energy substitution and sluggish economic growth in consuming nations, and therefore the ability to pay for imports, cloud the outlook for prices. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Mon Jun 23, 2008 8:49 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
Starvid wrote:
MrBill wrote:
higher prices are a wealth transfer from consumers to producers.
That's why I decided not to be a consumer of oil, but instead a producer.
MrBill wrote:
petroleum is the 10% of the economy that allows the other 90% of the economy to function.
10 %? More like 5 %, at most...
True. But I fudged a little just using $130 x 85 mbpd x 365 days by leaving out the costs of refining, etc. under the KISS principle. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Jun 24, 2008 9:05 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
mobil1 wrote:
"In the absence of any additional crude supply, for every one percent of crude demand, we will expect a 20 percent increase in price in order to balance the market."
I think it very inappropriate that the highest, most official
US spokesman on energy matters would make a statement
like that.
If all he was trying to convey was that oil prices are sensitive
to demand, that's how he should have said it. Having specific
numbers and using the word percent may be widely misinterpreted as the actual relationship, and nobody knows and perhaps cannot
know what the price elasticity is with reasonable accuracy.
I don't know if Bodman is actually capable of performing long
division but I am highly confident he didn't do the calculations
before opening his mouth.
Posted: Tue Jun 24, 2008 10:31 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
So true aaha,
Maybe we should prepare ourselves for a relentless barrage of inaccurate and down right silly statements. It's has occurred to me that the effort to help the masses absorb the implications of PO may take a hit as the presidential race picks up speed. Given the nature of our two party system to try to use any negative series of events to crucify the other side we may see an unprecedented amount of bad information and projections.
Posted: Fri Jun 27, 2008 3:27 am Post subject: Re: For every 1% of crude demand, a 20% increase in price
These are just stabs in the dark, but they are as good a place to start as any...
Quote:
Gasoline prices are becoming so unbearably high that one of Canada's top banks is predicting a "mass exodus" of vehicles from U.S. highways within four years, with a slightly less dramatic drop expected in Canada.
CIBC World Markets said in a report Thursday that gas prices in the U.S. will hit US$7 a gallon -- the equivalent of C$1.86 a litre -- two summers from now. That marks a 70 per cent increase over today's record levels.
"Over the next four years we are likely to witness the greatest mass exodus of vehicles off America's highways in history," wrote chief economist Jeff Rubin.
There will be about 10 million fewer vehicles on U.S. roads by 2012 and average kilometres driven will drop 15 per cent, the report said.
Canada will only experience about 70 per cent of the U.S. decrease, said CIBC economist Benjamin Tal.
"Canada will feel the pain, but it's not going to be the same as in the U.S.," Tal said in an interview, noting that there will be about 700,000 fewer cars on Canadian roads by 2012 and a 10 per cent decrease in average kilometres driven.
Just some behavioral finance stuff I found interesting. FWIW.
Quote:
Most economic theories assume that human beings understand their own interests and act rationally to promote them. But what if even executives making business decisions, which ought to be economically rational if anything is, fall victim to personal weaknesses such as overconfidence, the herd mentality, and false consensus? This special collection on behavioral economics explores the psychological dimensions of strategy.
source: Hidden Flaws in Strategy _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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