The Law of Supply and Demand At Work

[TrainTrac]

See? The law of supply and demand and a free-market economy works, despite all the cries of price gouging and for gov't price controls!

OPEC oil price falls below $50



LONDON (Reuters) - OPEC's own oil price fell below $50 a barrel for the first time since the start of June on Thursday, touching a level that may trigger calls from some producers for the cartel to cut output.



The value of OPEC's basket of crudes fell to $49.73 a barrel on Wednesday, the group said on Thursday, down from $50.01 the previous day.



A mild northern hemisphere autumn has wiped a fifth off the cost of oil since late August when hurricane damage to the U.S. industry sent prices to record highs.



OPEC-member Venezuela, typically hawkish on prices, has already said the organization might need to consider cuts to offset recovering U.S. production from the Gulf of Mexico.



The decline in the basket price may pull other OPEC ministers round to Caracas's view.



Oil producers have grown accustomed to prices well in excess of $50 after a two-year rally fueled by strong demand from top consumer the United States and the rapidly expanding economies of China and India.



But evidence that record high prices are dampening demand has convinced some in the cartel that the OPEC basket price can ease toward $40 before supply cuts become necessary.



"No one will cry if the OPEC basket hits $45, but $40 might be a different story," said an OPEC delegate.



The producer group has been pumping flat out at about 30 million barrels per day (bpd) to keep world markets supplied, with Saudi Arabia taking the lead. It meets next on December 12 in Kuwait to chart oil production policy for early 2006.



The 11-member producer group may decide then not to re-offer its spare capacity of two million barrels per day. The initial offer, made at its September meeting, expires at year's end.



"No one has taken us up on it yet," said the OPEC delegate.



OPEC President Sheikh Ahmad al-Fahd al-Sabah of Kuwait said earlier this week the group would wait until cold weather sets in before deciding production policy.



On Thursday, temperatures in northern Europe sank and forecasters predicted a cold snap in the U.S. northeast.



"I think now everybody...is more satisfied with these prices than before," Sheikh Ahmad said at the weekend.



In 2003, OPEC's crude price averaged just $28.1. It peaked above $61 on September 1.



"My own view is that they don't want it to far too far below $50," said Kevin Norrish of Barclays Capital. "But a couple of things are probably constraining them from upping the ante in terms of rhetoric."



There is uncertainty over the requirement for OPEC oil in the short term, he said, and a relatively strong dollar is offsetting the weakening oil price.



OPEC's basket of oils is normally valued at around a $7 a barrel discount to U.S. crude. On Thursday morning U.S. crude was hovering below $58 after a surprise drop in U.S. crude stocks sent it racing $1 higher late Wednesday.

 

[Todd Z]

 

[Thomas Rogers]

So the prices have been dropping steadily the past few months because demand has been dropping proportionally?



Or conversely, demand shot up proportionally to the dramatic price increases we saw during the hurricane season?



TJR

 

[Gavin Allan]

I remember not very long ago some economists were predicting $50 a barrel oil prices, but most of them thought these folks were crazy....

 

[TrainTrac]

A mild northern hemisphere autumn has wiped a fifth off the cost of oil since late August when hurricane damage to the U.S. industry sent prices to record highs.



OPEC-member Venezuela, typically hawkish on prices, has already said the organization might need to consider cuts to offset recovering U.S. production from the Gulf of Mexico.

Lower demand + higher supply=lower prices.

 

[Thomas Rogers]

lower demand + higher supply = lower prices.

Sure, can't argue with that.



But I do think that the higher prices we saw during the hurricane season were disproportionate to the lowered supply, especially since we saw some dramatic price increases that were no doubt over-reactive to a speculative decrease in future supply.



And, likewise, there might very well be an attribution error going on here, because I suspect that the lowered demand of this Fall in the Northern hemisphere again is disproportionate to the lowered prices. In other words, it might be related, but not singularly the cause.



Thats the way I feel, as you know, TrainTrac, and all that I am saying is that I feel there was more than true supply v. demand going into the dramatic price hikes of August/Sept, and if that was inflated beyond what true supply and demand would inflate, then the drops since may have a recovery component to them.



Besides, I am LESS talking about oil prices than I am talking about gasoline prices. $.75 per gallon increase over a 2 day period is NOT supply and demand (IMHO), because the supply doesn't change that quickly...there is no TAP that just gets shut off instantly. $.75 increase in two days in gasoline prices is more speculation than true supply/demand base, IMHO.



Now, you and I agree that "ANTICIPATED FUTURE SUPPLY" is part of the equation for setting current price then we have a common ground. I can agree with that; but then that means the price is subject to speculation, and speculation can be "worst-case", and if overly dramatic, that "worst-case" price increase could be considered "exploitive" by many.



TJR

 

[Tom Schindler]

lower demand + higher supply = lower prices.



lower demand + cut production = higher prices.



They win again.





Tom

 

[Thomas Rogers]

EXACTLY Caymen.



Doesn't it suck when there is no true competition in an industry. When a group can collectively work together and demand that their terms be met and as a result the consumer takes it on the chin in the form of higher prices.



Kinda like unions!



TJR

 

[Jeff C]

ROTFL TJR!

 

[Tom Schindler]

TJR,



Nothing like Unions unless you have the union busting mentality. Then you see everything good a union does as bad.



I hope you enjoy your Thanksgiving weekend off. Your Welcome.





Tom

 

[TrainTrac]

I'll agree with you, Tom, on futures speculation having an impact on the prices also. However, even during August and September, the market continued to work as it's supposed to. If all the cries of price gouging had resulted in government intervention and price controls, then supplies would have been depleted or diminished to dangerously low levels, which would then resulted in higher prices. Just look at everyone who thought that we'd run totally out of gas, paniced and started hoarding all the gas they could get their hands on. The prices at that time helped to control that panic buying to some degree. If there would have been gov't price controls, the ready supply of fuel would've been depleted even more.



And prior to the hurricanes, gas prices were already beginning to increase anyway, as demand was rising due to people traveling more on their last vacations of the summer. Also, refineries were beginning to retool to produce more home heating oil for winter. This is a cycle that happens every year, the hurricanes were just a stroke of bad luck that severly impacted production. Futures speculators probably did overreact to the hurricanes, and this obviously had an impact on the rising gas prices.

 

[WXMotorSports DecalsPartsAccs]

I'm with you TJR. As I have stated plenty of times. I can drive two blocks and see gas prices from 2.75 a gallon to 2.35 a gallon. Maybe the city I live in has new gas taxes based on what block you open your station in but I highly doubt that.

 

[Thomas Rogers]

The prices at that time helped to control that panic buying to some degree. If there would have been gov't price controls, the ready supply of fuel would've been depleted even more.

What's to say the dramatic price increases didn't actually FEED the hoarding. Many people who saw 50¢ price jumps in one day were hoarding because they wanted to stock up on gas at today's price fearing that next week it would be a dollar a gallon higher.



The dramatic increases, caused by a speculative long-term decrease in supply due to shut down refineries caused a frenzy of price increases, and that caused a frenzy of buying (see Atl suburbs).



So, the way I look at it now that it has all blown over, the supply decrease was actually limited, the price increases were dramatic, and any real increase in demand was probably mostly caused by the price increases.



That's the way it seems to me, the consumer.



TJR

 

[TrainTrac]

Nothing like Unions unless you have the union busting mentality. Then you see everything good a union does as bad.

Yup, just ask General Motors, Delta Airlines, or Delphi. Unions have sure been good to them. GM may have to file for bankruptcy, and Delta and Delphi already have done so, citing high labor costs and employee health care costs as some of the reasons.

I hope you enjoy your Thanksgiving weekend off. Your Welcome.

:huh:

 

[Thomas Rogers]

Nope, Caymen, I don't have a Union Busting mentality, not at all.



But I suspect you are too close to the union issue, because the example here is exactly like unions.



I will try again.



Consider the following description of an organization:



"A group coming together and colluding to set a price for a durable good or service."



Isn't that what unions do? Are you disagreeing that unions don't do that? That a union strike isn't exactly that?



The fact that the above description works equally well for OPEC as it does Unions isn't my fault.



TJR

 

[Tom Schindler]

I guess we blame our credit card companies when we spend more then we pay back. GM, Delphi, Delta, etc. did not put enough money into thier pension fund when they should have. Now they want everyone to feel sorry for them. If they invested like they should have, they would not be in this situation. When they were giving out bonus after bonus without investing money into the production areas, theier production slipped. Blame the unions for that. When they decided to cut costs by making an inferior product, so sales started to slip, so they make it even cheaper then before to slve the problem. Blame the unions for that. It seems to be working.



Don't blame the unions for your own doing.



TJR, good points, unfortuantly they arent the same, for your benefit. We will strike ONLY when there is no other choice. We don't demand money when times are hard. The union I belong to gets about a 3% raise every year. What is the rate of inflation?



Not all unions are bad. There are many different unions out there, the is only one OPEC.



Diamonds coming into the US has to go through a broker because the DeBeers family is a monopoly on the diamond industry. Should we do the same with OPEC?





Tom

 

[Tom Schindler]

Double post

 

[Thomas Rogers]

Right, Caymen! OPEC might be different then most unions in many ways, but essentially they are all organizations that have the same goals in mind and use the same tactics to achieve those goals.



I never said unions were bad, Caymen. I just find it ironic that you, a staunch advocate for unions, complain about an organization that practices "collective bargaining".



Just be careful because some would call you a hypocrit. I wouldn't, but some would.







Oh, and you have a great Turkey Day too!



TJR

 

[Tom Schindler]

I don't consider myself a hypocrit. I am many other things, some are bad.



I see OPEC as more of "Price fixing". They ultimatly decide the final price. If all of the fast food places said tomorrow, from now on, a burger is going to cost $5.00 not matter if it is a Wendy's single, Big Mac, or a Whopper. It is going to cost $5.00.



They are not negotiating prices. If they did that, I wouldn't have a problem. When buying a car, you negotiate the price. You deal and say, instead of giving me $100.00 off the car, just give me floor mats. The same goes for my negotiated wages. I choose if I want high pension benefits or a higher wage. Maybe I will trade my higher wage for benefits I don't have to pay for. If the company adds responsibilities to my job classification, I can then request more money. At work, I do Radiography, Magnetic Particle Inspection, and Liquid Penetrant inspection. I also remove weld discontunities so a welder can come behind me to repair the weld. Before I started, that classification was a level 13. They then added Crane operating to that classification. I also run a 100 ton overhead crane lifting components thet are worth 10 million dollars+. We are now a level 14. The pay is only about 30 cents an hour more, but we are required to do more.



What incentive does OPEC have to boost production when the price is high? None.





Tom

 

[John Mastrocco]

The fact that you put "Collective bargaining" in quotes makes me believe you are being totally facetious.



In reality, OPEC has nothing to do with "collective bargaining" or any other kind of bargaining, for that matter. OPEN is a cartel that effectively forms a monopoly. OPEC can set whatever production amount it's members agree on without any input from their 'customers' and then follow those output levels as a group.



Unions can't do anything without an agreement from their customer - the company for which they work. Sure, they can strike and withold labor, but the company can also work around that strike in whatever way they can manage. (You are free to call a strike 'extortion' if that's how you view it, but it's still not anything like OPEC.)



Bargaining requires two groups to enter into an agreement. I don't ever remember being given the opportunity to decline OPEC's 'offer' - or OPEC even making an offer. For a Union to be like OPEC they would have to be able to tell management they will get more money for less work and management would not have any say in the matter whatsoever.



I don't see any correlation whatsoever. One dictates (OPEC), the other bargains (Unions.)