carbonates

How Elastic Is the World's Oil Supply?

Thanks for the link to the report. As someone on the supply side of the business, maybe I have some insight. Maybe.

"Based on these inventory figures, current prices, although high, are not prompting the
inventory accumulation that would be associated with artificially high prices."

I think the problem they are alluding to is that while market demand has dropped, it appears that market supply has fallen as well. In this business, falling supply is not necessarily related to market forces. There are lots of areas the world-around that are in declining production mode and even more that are politically-impeded. There are very few that are actually increasing their production, and this is not due to the market, it is mostly due to geology and engineering.

It takes time find new oil reservoirs and to drill new wells and add production using the newly justified economics of higher prices. Most oil companies (wisely) refuse to have faith in current market prices to predict economics of drilling new prospects, and whatever benchmark price they use (often only 50% of current prices) can determine whether or not a well gets drilled.

There are very few producers that have the ability to turn on the taps and produce oil at a higher rate just because prices are rising. The market impetus is there, but geology and engineering limitations do not always respond to market forces. Often, increasing production rates can damage a field and reduce long-term production. One of the few short-term responses in the market supply is often the oil moving in tankers, which can be diverted to different ports depending on prices while still in transit.

The problem is not the speculators, it is declining production and the failure of many producers to replace reserves- pointing to long-term problems and thus changing the market character from backwardation to contango. The speculators have merely reacted to the inability of the supply side to respond to the demand side in a timely manner.

For everyone who thinks the oil market is somehow a perfect market (and that speculators are the control), I like to use the analogy of the corn market. If you can predict the weather a year ahead, you can master the corn market. Oil is no different- except there are probably just about as many factors as those that affect the weather, and they are just as complex.

As for the previous comment on how prices of gasoline are not falling as fast as the price of oil -be very very glad. Gasoline prices never got up to an equivalent price of oil and were lagging behind strongly. Oil was selling for $3.45 a gallon at $145 per barrel, and a barrel of oil does not make 42 gallons of gasoline- it only makes about 25 gallons, meaning wholesale gasoline could have reached well above US$4.00 per gallon (that would have put retail above US$5/gallon)!!!