Oil Prices: Speculation or supply and demand?

[Kidlicious]

Originally posted by Victor Galis


Everyone should also know that "free" markets are a myth invented by neoclassical economists to keep the math simple.

Most markets are complex. Producing oil is risky investment that is based on economic projections that are really just as likely to be inaccurate as accurate. Although you have many producers the outcome is likely to be inefficient more often than efficient because of lack of central planning. With central planning you don't have to make projections based on price, only on requirements.

[ramseya]

Although you have many producers the outcome is likely to be inefficient more often than efficient because of lack of central planning.

Wow... just gloss over 200 years of economic theory and research...

What makes you think the central planners will be any more accurate than various companies and individuals? Because their projections will be based on requirements, instead of price? Requirements based on what? People have under or over-estimated gasoline consumption all the time.

anyway, I might be wrong on this but I don't see why oil companies will base anything on price. The amount of oil they can drill and/or refine is fixed in the short-term, as is demand. Barring collusion, prices aren't really relevant as Exxon, for example, wouldn't be well-served by holding up supply to inflate prices as its competitors would compensate for the shortfall.

Of course, there is definitely collusion in the oil industry what with OPEC, but even OPEC has historically had difficulty manipulating prices due to incentives to break agreements and over-produce. Look at the 90's: oil was $12/barrel in 98! OPEC should have gotten all its members to stop the pumps but it couldn't.

[rmsharpe]

Originally posted by Kidicious
Pooping in the woods is just fine. Not having to be subjected to lying and manipulation would be a better indicator.

Well, you'd better throw out everything you own then.

[Kidlicious]

Originally posted by ramseya


Wow... just gloss over 200 years of economic theory and research...

What makes you think the central planners will be any more accurate than various companies and individuals? Because their projections will be based on requirements, instead of price? Requirements based on what? People have under or over-estimated gasoline consumption all the time.

The requirements would be based on population growth and demographics as well as industrial needs.

anyway, I might be wrong on this but I don't see why oil companies will base anything on price. The amount of oil they can drill and/or refine is fixed in the short-term, as is demand. Barring collusion, prices aren't really relevant as Exxon, for example, wouldn't be well-served by holding up supply to inflate prices as its competitors would compensate for the shortfall.

When oil companies decide whether to invest in drilling or not they have to predict the future price of oil. They can't get the investments with out projections of future prices. If they did prices would be even more ****ed up than they are now.

Of course, there is definitely collusion in the oil industry what with OPEC, but even OPEC has historically had difficulty manipulating prices due to incentives to break agreements and over-produce. Look at the 90's: oil was $12/barrel in 98! OPEC should have gotten all its members to stop the pumps but it couldn't.

There is no control of oil prices now at all. The SA doesn't even want high prices because they don't want more people to drill and develope alternatives.

[Kidlicious]

Originally posted by rmsharpe

Well, you'd better throw out everything you own then.

What are you saying, that lying and manipulating is the only way to own things?

[ramseya]

The requirements would be based on population growth and demographics as well as industrial needs.

No one can get this right now though! There are many governmental and non-governmental organizations (like the International Energy Agency) that try to estimate this stuff and still get it wrong.

When oil companies decide whether to invest in drilling or not they have to predict the future price of oil.

This price is just the nexus of supply and demand though! How do they project a price? By estimating future demand the same way your central planners would plus estimating future supply, also the same way you central planners would. The only difference is the central planners don't have to factor in other companies'/countries' supplies, only their own maximum that can be drilled but even that is something that isn't necessarily accurate... prospecting for oil is risky business, even if central planners are doing it.

There is no control of oil prices now at all.

Exactly. So as collusion is difficult, if not impossible, oil prices are generally left to natural, free market supply and demand factors... which means that conscious manipulating of price doesn't happen. Which was my whole reason for saying that oil producers aren't projecting based on this concept of price independent of supply and demand. Only if there was collusion or a monopoly would price be independent of supply constraints.

[rmsharpe]

Originally posted by Kidicious


What are you saying, that lying and manipulating is the only way to own things?

I didn't say it, the left-wing said it.

[Kidlicious]

Originally posted by ramseya
No one can get this right now though! There are many governmental and non-governmental organizations (like the International Energy Agency) that try to estimate this stuff and still get it wrong.

Everyone uses demographic information for planning. Governments use it to plan roads, schools, etc.. Businesses use it to plan expansion or not. Everyone who plans to meet societies future needs uses demographic information.

This price is just the nexus of supply and demand though! How do they project a price? By estimating future demand the same way your central planners would plus estimating future supply, also the same way you central planners would. The only difference is the central planners don't have to factor in other companies'/countries' supplies, only their own maximum that can be drilled but even that is something that isn't necessarily accurate... prospecting for oil is risky business, even if central planners are doing it.

No. When planning is centralized most of the risk is eliminated. That is the risk that the other suppliers will expand more than you expect them too. But centralized risk isn't even a big deal. If the price of oil decreases society benefits. Although it would be less than an optimal benefit it's better with market planning because in a market producers will tend to over compensate for low prices and not expand enough. That is what has happened in the last few decades in the oil industry.

Exactly. So as collusion is difficult, if not impossible, oil prices are generally left to natural, free market supply and demand factors... which means that conscious manipulating of price doesn't happen. Which was my whole reason for saying that oil producers aren't projecting based on this concept of price independent of supply and demand. Only if there was collusion or a monopoly would price be independent of supply constraints.

I'm not sure what you mean by "price independent of supply and demand" or how it's relevent.

[Kidlicious]

Originally posted by rmsharpe

I didn't say it, the left-wing said it.

??????

[ramseya]

Everyone uses demographic information for planning. Governments use it to plan roads, schools, etc.. Businesses use it to plan expansion or not. Everyone who plans to meet societies future needs uses demographic information.

well yeah but that doesn't mean they get it right! That's my point, projections of oil demand have been wrong in the past and will continue to not necessarily be accurate. And as you said, businesses, such as oil companies, use this information, as well as your central planners, so what sort of knowledge advantage would central planners have by just trying to meet requirements?

No. When planning is centralized most of the risk is eliminated. That is the risk that the other suppliers will expand more than you expect them too. But centralized risk isn't even a big deal.

Oil prospecting is still risky... Unless your central planners have x-ray vision and can know which parcel of land has oil or not and how much is in it.

and you missed the whole point of my original statement which was to say that central planners would have no advantage over the market in meeting a stable level of oil supply and consumption. This whole idea of companies have to worry about projecting prices, while central planners don't, is false because, as I said, price, in the absence of collusion, is just the nexus of the same exact supply and demand constraints that your central planners are concerned about.

Although it would be less than an optimal benefit it's better with market planning because in a market producers will tend to over compensate for low prices and not expand enough.

huh? But low prices would be the result of either too much supply (so no need to expand!) or not enough demand (so again, no need to expand!). Again, you seem to think prices are some abstract concept set by someone with no relation to actual supply and demand for oil.

[Kidlicious]

Originally posted by ramseya
well yeah but that doesn't mean they get it right!

I don't think you understand how simple it is to estimate how easy it is to estimate demographics. But the point is that that's what is already done when demand is forecasted by oil producers. Don't you think the Saudi's have a fair estimate of what the market demand for oil will be in 30 years, and don't you think they consider that in their planning?

That's my point, projections of oil demand have been wrong in the past and will continue to not necessarily be accurate. And as you said, businesses, such as oil companies, use this information, as well as your central planners, so what sort of knowledge advantage would central planners have by just trying to meet requirements?

Oil producers have to estimate the future capacity of the other producers. That's going to make their projections less accurate than if they didn't have to do that. That's what makes central planning more effective.

Oil prospecting is still risky... Unless your central planners have x-ray vision and can know which parcel of land has oil or not and how much is in it.

Prospecting has nothing to do with the point I'm making. I'm talking about investing in actual production.

and you missed the whole point of my original statement which was to say that central planners would have no advantage over the market in meeting a stable level of oil supply and consumption. This whole idea of companies have to worry about projecting prices, while central planners don't, is false because, as I said, price, in the absence of collusion, is just the nexus of the same exact supply and demand constraints that your central planners are concerned about.

No. If you know what the supply will be in the future you have a better idea of what the price will be. Demand is easy to forecast. It's supply that is tough.

huh? But low prices would be the result of either too much supply (so no need to expand!) or not enough demand (so again, no need to expand!). Again, you seem to think prices are some abstract concept set by someone with no relation to actual supply and demand for oil.

No. When you control the supply you control the prices.

[ramseya]

Have you ever heard of a UCLA Finance professor named Richard Roll who did a study in the 80's which found that futures traders had, implicit in their prices, predictions about the weather which were more accurate than the predictions of weathermen, largely due to the greater incentive for accurate predictions among traders relative to that of salaried meteorologists of the National Weather Service. Of course, the traders used the forecasts gleaned from weatherman but also other information such that their consensus (a market consensus) was shown by Roll to be more accurate than the forecasts of the government experts.

I quote from http://predictocracy.org/blog/?p=90

Roll showed that these prices were statistically significant predictors of the service’s forecast error (the number of degrees by which the temperature would diverge from the service’s prediction)

back to you...

When you control the supply you control the prices.

Are you saying the central planners control the prices or that businesses do. If the latter, no... as we already established, collusion hasn't been effective so therefore, price manipulation is difficult in the oil industry meaning that oil companies are price takers, not price makers.

[Kidlicious]

Originally posted by ramseya
Have you ever heard of a UCLA Finance professor named Richard Roll who did a study in the 80's which found that futures traders had, implicit in their prices, predictions about the weather which were more accurate than the predictions of weathermen, largely due to the greater incentive for accurate predictions among traders relative to that of salaried meteorologists of the National Weather Service. Of course, the traders used the forecasts gleaned from weatherman but also other information such that their consensus (a market consensus) was shown by Roll to be more accurate than the forecasts of the government experts.

I quote from http://predictocracy.org/blog/?p=90

Futures? Why do you think futures contracts are so short? We are talking about predicting prices over 30 year periods.

Very interesting theory though.

back to you...



Are you saying the central planners control the prices or that businesses do. If the latter, no... as we already established, collusion hasn't been effective so therefore, price manipulation is difficult in the oil industry meaning that oil companies are price takers, not price makers.

Since no one controls the supply in a free market I must be talking about central planners controling the price.

[DanS]

I don't know how much of the oil price is attached to speculation, but my family has been in the oil business for generations, and still oil prices aren't high enough for everybody to get off their asses and drill.

I think a lot of oilmen don't believe that these prices will last very long, making them hesitate to drill to increase production. They've been burned very badly before (the late 90s as just the latest example, where they were basically giving oil away). This goes for my dad, a very small-fry wildcatter, as well as Exxon-Mobil, the most valuable company in the world. It was interesting to note that Exxon-Mobil's production decreased even though it had record profit this quarter.

[Kuciwalker]

No. When planning is centralized most of the risk is eliminated. That is the risk that the other suppliers will expand more than you expect them too. But centralized risk isn't even a big deal.

Oh dear god, how wrong this is and how much you hurt my head, Kid.