Sophisse

Oil Swings Go Beyond Fundamentals

I think people expect prices to go up in some proportion to demand going up. And maybe they are right.

But consider this thought: what if, up till now, supply has basically been sufficient to satisfy every mile that anyone wanted to drive. I.e. there's extra capacity that could be ramped up. In that world, prices are a function of costs, plus some decent profit to suppliers. If suppliers want more profit, they have to organize a cartel, i.e. OPEC.

Now imagine that we have just crossed the line to a world where there are a few more miles people want to drive than there is gas to power them. Now, the prices have to rise to the point where some people who want to drive some miles, decide not to. I.e. prices are determined by value to the customer.

Cost + profit is a totally different number than utility value to the customer. Flipping from one to the other could involve a small amount of oil but a huge swing in prices. Like we're seen.

Analogy: if 10 guys come in from the desert dying of thirst and there's a whole costco full of water there, they are going to get their water for a buck a bottle like anyone else. But if 10 guys come in from the desert and there are only 9 bottles of water for sale, whoever sells those bottles is gonna get their whole wallets and credit cards because someone is going thirsty.

Read the IEA report. People are going thirsty. The big question to me is, will new production get us back into the lovely world we have been so used to for all these years? Or are we in a world where every extra gallon burned in BRIC has to be balanced by a gallon less burned in US/Europe?

Course, maybe it's just a bubble /shrug