oiler1930

How Elastic Is the World's Oil Supply?

I watch the EIA weekly petroleum reports, and have been tracking them for over five years. One key that I use is the number of days' supply, the quotient of crude inventory over daily inputs to refineries. This value ranges from ~.17 to 24 days. In the last year, crude oil prices doubled, while the days dropped from 22 to 19. The reduction in inventory total cost was several billion dollars! Management usually has two discretionary costs, maintenance and inventory. The carrying cost of the current inventories can be tied to whatever return on money you wish, say 4% long bonds, or prime rate; doubled inventory cost carriage can be carried a little more easily by the lowering of inventory quantity by 15%. Reduction of maintenance costs brings piper paying time closer, but is often done to stay our of chapters 11 or 7.

As a corrolary, should prices drop the addition of cheaper inventory quantities lowers the average cost. With a twenty day nominal inventory, turnover is swift, and a larger inventory at a better comfort level is affordable.