Wednesday, June 11, 2008

An interesting chart

I am for all the proposals by the Republican side, but don't see how they came up with these figures.

The price of a commodity is normally identical to the marginal cost of production,-when supply and demand are in equilibrium. This makes sense since producers will always try to add production whenever the cost of production is below the going price. The current oil price is due to in elasticity: It takes time to bring new production on-line and people cannot instantly adjust to the new higher prices. The cost of production of oil from non-conventional sources such as coal, deep water oil wells and shale oil are all well below the current price of oil; so it is only a matter of time before the price declines back to the cost of production. In the mean-time there is a shortage. What this leads to is that the price will be governed by the utility value. People will pay whatever it is worth to them to get the product. A minimum wage worker simply will not spend $50/day to commute to a job which pays $40/day. A surgeon who makes $1,000/day will spend $50 to get to work.

Predictions of what small increases in the world supply of oil will do to the price are hard to make. Two million extra barrels per day of supply could push the price right back down to marginal costs of production--say in the $50 area. This production could also make little difference for two reasons: 1. Saudi Arabia could just cut production by the same amount. 2. By the time the new production came on-line, there could exist high value demand (doctors who need to get to work etc.) which would sop-up the new supply.

Now, would it be rational for the Saudis to try cutting production? It all depends on the numbers...

Let's say in a few years, oil from ANWAR starts to come on-line and the price then is $150 per barrel. Let us say that this new source would cause a collapse to $50, and that the Saudis produce 10 million barrels per day. If they keep selling all 10 million barrels they will get 1/2 billion dollars per day. If they cut back by two million barrels they will get 1.2 billion dollars per day.

Of course this assumes that the price would collapse, which might not be the case. From the standpoint of our national interest, it doesn't really matter what others do. If we produce our own oil it will certainly help us with our balance of payments problems. Bear in mind that ANWAR alone contains at least one trillion dollars worth of crude oil.


Anonymous said...

Plenty of supply available:

ANWR - not every square inch on this planet needs to be drilled, some places are sacred.

RECORD profits continue in 08 too! It is simply collusion by all to raise prices to everyone can make more coin:

Alternative energy investment instead to help us - hello ...

dbp said...

--I don't think F. William Engdahl is at all persuasive.

--It will take like 2,000 acres of drilling in an area the size of South Carolina. Some places may be sacred, but the supposition that all of ANWAR is is nothing more than Gaia worship. If all of ANWAR is sacred, then every part of the Earth could with equal justification be considerered the same.

--Profits are good, that is where money comes from for new developments.

--Alternatives are great, as long as they provide more energy/$ than conventional sources.

dbp said...


Here is a thought: How about we think of the oil derrick as a kind of shrine? It honors the bounty of Gaia, who in her goodness has formed liquid hydrocarbons for the good of Humanity.

Anonymous said...

Another reality, even if we open up a couple of new wells at ANWR in 3-5 years, even if the best estimate of how many barrels are there is correct, will it, in any way, drop the price of gasoline at all? by 10 cents? by a dollar?? NEVER

dbp said...

Will one session of excercise keep you fit? No. But if you use that as an excuse to NEVER excercise then you will be weak and out of shape.

ANWAR, by itself will do little to decrease the price of gasoline, but it is a step in the right direction. And as I pointed-out, if nothing else it will be great for our trade deficit since that is a trillion dollars worth of oil we won't be sending dollars overseas for.

Anonymous said...

Oil is a non-renewable resource. Therefore, once extracted, it is gone. Whereas, the focus and investment in the alternative energies will give us much more return on investment in the long run and contribute more to lowering the cost of energy.

I am one who WOULD allow drilling off the ocean off ANWR (vertical then horizontal drilling technology that exists). Step 1) Review all environmental impact plans with representatives from Gov't and a couple selected environmental groups, if it is sound, then move to step 2) Take a $10 billion dollar cash deposit, refundable more each year after year 10, so that, in the event of an ExxonMobil oil spill devastates the area off shore, one has enough capital to levy fines, partially use, and threaten to shut down the operation immediately. If these two, simple, fair, expectations are met, let them drill. Our pristine environment may even benefit from local development, recreation, and conservation.

dbp said...

Dear anonymous,

I am not sure if drilling in the ocean off of ANWR is possible. As you may know, the ocean freezes there in the Winter. There are not to my knowledge, structures which can withstand the force of thick moving ice.

Besides, I am not sure what the benefit would be: Any spills in water will be harder to contain or clean-up than if they were to happen on land.

Anonymous said...

OK, more facts to why drilling is NOT the answer:

1) There is some fact floating around that the oil companies do not drill on some 80% of the land they already own. Oil companies are trying to grab as much land as they can, even ANWR, for the future. Drill on their own land first, suck up all available oil (including in shale) then look for new land.

2) Even if ANWR was visited today. It would take 10 years according to one estimate to start to extract the oil here. Again, this will not even make a dent for a very long time. Think of the monsterous project that will inherently be corrupt and pollute then think of how much easier it will be to set up a system of RENEWABLE energy systems such as Geothermal, Wind, Solar. Let's start saving money and build networks that will be around for much longer.

3) There's alot of new studies and regulations starting to be considered and come out about small particles building up in our lungs and posing an increased threat to us more than ever. Very dirty technologies combined with industrial pollution is very dangerous.

I admit, one doesn't know who to always believe but, I am more inclined to believe a) enviromental groups then b) the gov't (EPA, Economic budget office) followed by c) the Oil companies themselves.

dbp said...


"1) There is some fact floating around that the oil companies do not drill on some 80% of the land they already own."

Leases are considered non-producing if no oil is being extracted. You yourself note below that it would take 10 years for oil companies, that already know that there is oil in ANWR to produce the first drop. It takes time and money to first explore and then extract oil and of course there may be no oil there. What accounts for innactive leases is just that: Explored and found to lack oil, or is being drilled or is still being explored.

2) People said the same thing about ANWR 13 years ago--of course had we started then, we would have the oil now. An immediate benefit would be to suck the air out of speculation, which is itself driving prices to some extent.

There is zero evidence that it will "corrupt and Pollute" If people want to invest in alternate energy schemes, that is fine--nobody is standing in their way: Unlike the fanatics who are standing in the way of clean, responsible extraction of oil from ANWR.

Anonymous said...

"Speculation" is a major culprit in the price explosion - I fully agree.