Sunday, July 6, 2008
A funny thing happened on the way to the gas pump
Oil is not priced like most sane goods. The price is not a buyer, say, me, will pay today to a seller with a gallon of crude. Rather, the price is an average of the futures contracts for some percentage of the world's supply. Got that? The price is what people think it will cost off into the future, not what someone will pay right now. (I'm having trouble finding links, but this is the way it works, baybee--I used to work for an energy company and wrote rather bewilderingly complex spreadsheets to determine this stuff--I'm looking, google, don't let me down......) Ahh, here's something. Notice, the futures contract price is the same as the spot price (actual cost) for "light sweet crude) in OK.
Because the price (and this is the actual price) we all hear quoted on the radio is unrelated to the price some average jo would pay, Oil is destined to bubble.
Plus, Oil does not require inventory. If no demand, the producers just don't pump it out of the ground. So, there's no pile-up of inventory when the price outpaces the demand.
If oil was considerably overpriced, and if the price was not set by the consumer, then you would expect that at some point, buyers couldn't find sellers.
Here's one, Iran.
Here's an entire blog that discusses these ideas rather exhaustively. As a disclaimer, the geologists I worked with seemed to think that oil had peaked around 1998 (unlike the website I linked to here) however, the current drastic run up in price is a bubble. It will go down prior to its slow, steady rise back up.