Sunday, March 21, 2010

Price of Oil Going UP! Gasoline over $3.00 by summer? Maybe, Maybe not...


The Organisation of Oil Exporting Countries (Opec) has agreed to keep to its existing oil output quota. The decision was widely expected but nonetheless sent the price of the UK benchmark, Brent crude oil, up by 72 cents to $81.25 a barrel.  US light sweet crude was up 77 cents at $82.47 a barrel. The oil producers' cartel is already exceeding its stated production target of 24.84 million barrels a day, but expects demand to mop up that extra. Saudi Arabia's oil minister said he expected demand to rise strongly.
With some of the worlds economy's (mostly in the developing world) already in recovery and the impending recovery in the "rich" countries (yes, it will happen), it is anticipated that the demand for crude oil will increase in kind.  For better or worse, oil is the resource of record for powering any economy's energy needs, ie. gasoline, power generation, etc.  Graph #1 below shows the relatively fixed nature of the supply of oil (S* at Qe).  As stated by the Saudi Oil minister, demand WILL pick up and drive the price higher, to say, "P1". 


A problem arises because often another member or members of OPEC (click HERE for list) tend to cheat on their alloted quota. The price will only stay elevated if the cartels quotas hold together and no one cheats.   If another member country goes over their quota it will INCREASE the supply (Graph #2) and shift the supply curve to the right (Q1)and decrease the market price (Pe(?)).  Point "C" on graph #2 represents the likely outcome when all is said and done.  When one member cheats then another may dump oil also to try to take advantage of any higher price that remains.  Unless some other variable comes into play, the price will retreat from its high, perhaps back to where it started.  Even with increased demand if there is a corresponding increase in supply then there is little effect on the market price...If we want to wean ourselves off of oil, this makes it very difficult....
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