My thoughts on the recent OPEC action
Well, it seems that the OPEC ministers are getting greedy again!
Not content with the price of oil, they decided to half production to keep the price above $60.00/barrell. I should maybe say that again. Deciding they want Democrats to win in November, they are trying to keep the price above $60.00/barrell. In any case, they have 1 1/2 weeks to see if this translates into the price at the pump - surprisingly, in my area, gas prices keep going down.
Oil is increasingly becoming like salt. At one time, salt was an important, costly commodity. That is, until refrigeration came along and you didn't need to salt every food item to preserve it (hence, we think lutefisk is yucky). And, around the same time, geologists discovered lots and lots of places to find salt. So whereas before you had lots of demand and little supply, the equation flipped you you had lots of supply and little demand. And the price dropped. This explains why you can have experimental cars drive all over salt flats in Utah without concern. It also explains why, today, salt is nothing more than a spice. With it being, like, $.99 per container (if that), the average American, at $42,0000, spends about 1/21000 of their salary per year on it. I.e., it is now a nominal spending item.
Same with oil. Although not so extreme. First, the demand side. With such high prices, people are switching to highbrids. Although you can get similar mileage with Marvel Mystery Oil, people are going toward partial electric, partial gasoline vehicles. Which means that the longer the price of gasoline stays as high as it is, more such cars will be developed. And as more such cars are developed, the ability to produce them goes down. Which means they get cheaper. Which means that not only will rich, elite leftists be the ones driving them, but not so affluent leftists will be driving them as well. If the price keeps falling, more normal people will purchase them, too, to save money.
Now, the price of oil will continue to stay high. Why? China is industrializing. They want oil to fund their economy. And not only is China gobbling up oil, but China is also looking for more fields, and doing some drilling itself.
Currently, with the current trends of consumption, it is believed that there is enough oil to last 200 years. That does not include the oil that has been found yet. For example, how much oil is there, in say, Anarctica?
Now, while you might argue that it is very expensive to drill there, you might be right. Oil is best extracted when drilled, not mined. Like what they do in northern Canada, in the Athabaskan oil sands. And it is more expensive to mine and process it.
However, there are now technologies to extract it that cost $15.00/barrell. And what is the current price? Even if we double the total cost of production to $30.00/barrell, including such things like bureaucracy, shipping costs, taxes, developing "high end" convenient stores (so why exactly did Chevron need to develop the "Extra Mile" concept anyway? It's just a gas station), executive bonuses, executive "retreats" to Amsterdam, and the like, that still leave a net profit anywhere from $20.00/barrell - $30.00/barrell. You are still in the range of "obscene profits."
And what does "obscene profits" do? Well, it invites competition!
And I only have talked about Canadian oil mining. I haven't even mentioned that stuff stuck in the permafrost that is east of the Urals. To compare how much is there, if Saudi Arabia's reserve of oil were equilivent to an airline bottle, Russia's reserve of oil would be equilivent to a keg. While there is added costs in additional "administrative fees" and "protection money," there is some infrastructure there, and wages are lower. The dumb kids in Russia study mining, not computer science or business (I know - I went to school with some of them at the leading mining school in Russia), so the amount it costs to pay them is lower. So that factor is lower. Yet, over all, there is still room in the price to generate some, but lesser, "obscene profits." ANd yes, there are other places that have oil - and places that haven't even been explored yet (or even thought of being explored yet).
And I forgot to mention that technology improves. When there is pressure on the price, there is pressure not only to try to cut wages, but also to develop more technologically efficient methods of extraction. The latter is often easier than the former. And, the latter is permanent. In any case, oil executives, not being stupid (as one can tell by their salaries), always look for ways to cut technological costs. Because even if profits are high, they know there will be competition, so they want to make production cheaper to keep the profits up - and maybe to keep the competition out for a while, by using lower cost to cut the cost per barrell (and start-up costs are too high compared to profits to enter).
So what is the moral of the story? All the kooks and nuts over at OPEC better watch themselves. Not only should they enforce a minimum price, but they need to enfore a maximum price, too - although there is only so much oil you can pump out of the ground at one time. For if they get too greedy, they will ultimately cut their own throats. That is the wondrous lesson of capitalism, and markets. And, maybe, there will not be any more money for terrorists to blow up things.
Not content with the price of oil, they decided to half production to keep the price above $60.00/barrell. I should maybe say that again. Deciding they want Democrats to win in November, they are trying to keep the price above $60.00/barrell. In any case, they have 1 1/2 weeks to see if this translates into the price at the pump - surprisingly, in my area, gas prices keep going down.
Oil is increasingly becoming like salt. At one time, salt was an important, costly commodity. That is, until refrigeration came along and you didn't need to salt every food item to preserve it (hence, we think lutefisk is yucky). And, around the same time, geologists discovered lots and lots of places to find salt. So whereas before you had lots of demand and little supply, the equation flipped you you had lots of supply and little demand. And the price dropped. This explains why you can have experimental cars drive all over salt flats in Utah without concern. It also explains why, today, salt is nothing more than a spice. With it being, like, $.99 per container (if that), the average American, at $42,0000, spends about 1/21000 of their salary per year on it. I.e., it is now a nominal spending item.
Same with oil. Although not so extreme. First, the demand side. With such high prices, people are switching to highbrids. Although you can get similar mileage with Marvel Mystery Oil, people are going toward partial electric, partial gasoline vehicles. Which means that the longer the price of gasoline stays as high as it is, more such cars will be developed. And as more such cars are developed, the ability to produce them goes down. Which means they get cheaper. Which means that not only will rich, elite leftists be the ones driving them, but not so affluent leftists will be driving them as well. If the price keeps falling, more normal people will purchase them, too, to save money.
Now, the price of oil will continue to stay high. Why? China is industrializing. They want oil to fund their economy. And not only is China gobbling up oil, but China is also looking for more fields, and doing some drilling itself.
Currently, with the current trends of consumption, it is believed that there is enough oil to last 200 years. That does not include the oil that has been found yet. For example, how much oil is there, in say, Anarctica?
Now, while you might argue that it is very expensive to drill there, you might be right. Oil is best extracted when drilled, not mined. Like what they do in northern Canada, in the Athabaskan oil sands. And it is more expensive to mine and process it.
However, there are now technologies to extract it that cost $15.00/barrell. And what is the current price? Even if we double the total cost of production to $30.00/barrell, including such things like bureaucracy, shipping costs, taxes, developing "high end" convenient stores (so why exactly did Chevron need to develop the "Extra Mile" concept anyway? It's just a gas station), executive bonuses, executive "retreats" to Amsterdam, and the like, that still leave a net profit anywhere from $20.00/barrell - $30.00/barrell. You are still in the range of "obscene profits."
And what does "obscene profits" do? Well, it invites competition!
And I only have talked about Canadian oil mining. I haven't even mentioned that stuff stuck in the permafrost that is east of the Urals. To compare how much is there, if Saudi Arabia's reserve of oil were equilivent to an airline bottle, Russia's reserve of oil would be equilivent to a keg. While there is added costs in additional "administrative fees" and "protection money," there is some infrastructure there, and wages are lower. The dumb kids in Russia study mining, not computer science or business (I know - I went to school with some of them at the leading mining school in Russia), so the amount it costs to pay them is lower. So that factor is lower. Yet, over all, there is still room in the price to generate some, but lesser, "obscene profits." ANd yes, there are other places that have oil - and places that haven't even been explored yet (or even thought of being explored yet).
And I forgot to mention that technology improves. When there is pressure on the price, there is pressure not only to try to cut wages, but also to develop more technologically efficient methods of extraction. The latter is often easier than the former. And, the latter is permanent. In any case, oil executives, not being stupid (as one can tell by their salaries), always look for ways to cut technological costs. Because even if profits are high, they know there will be competition, so they want to make production cheaper to keep the profits up - and maybe to keep the competition out for a while, by using lower cost to cut the cost per barrell (and start-up costs are too high compared to profits to enter).
So what is the moral of the story? All the kooks and nuts over at OPEC better watch themselves. Not only should they enforce a minimum price, but they need to enfore a maximum price, too - although there is only so much oil you can pump out of the ground at one time. For if they get too greedy, they will ultimately cut their own throats. That is the wondrous lesson of capitalism, and markets. And, maybe, there will not be any more money for terrorists to blow up things.
posted by EricMatthew at 9:50 PM
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