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Imperial Forum → Politics → Oil prices plummet after G. W. Bush eliminates executive order...
supply vs demand
Just to point this out - and to maybe ring a true note with a few of you...
When is it easier to make more money off of IC's market?
When the price differential is 18-21 or 6-8?
For those of you that said 6-8, thank you, I appreciate you.
For those of you that said 18-21... well, whatever, don't play the market... you won't do well.
Lower prices with the same dollar figure mark up means higher margins - meaning higher profits per "good x" (barrell of oil) sold.
In the case of many upstream oil companies. the margin will not hold at "8% above what we paid" - due to excessive competition - the margin is more likely to hold at "we make an extra two dollars a barrell"
Thus, when the price of a barrel goes up, and companies can not raise their *margin* by the same percentage - they are losing financial flexibility at the sake of making a lower percentage off of each barrel they sell.
Get it? Got it? Good.
Of course in ic the % profit is higher in the example you gave but the oil market is not IC and in real life higher prices tends to lead to higher profits for oil companies.
http://news.bbc.co.uk/1/hi/business/7372509.stm
"Oil firms Royal Dutch Shell and BP have made better-than-expected first-quarter profits thanks to the rising price of oil,"
Or maybe its a coincidence that oil companies worldwide are making record profits.
And what about the rest of the companies involved in oil production?
Particularly: Refineries, gas stations, etc? Again, we aren't limiting this to big oil companies (as pointed out earlier). Are we? And the other question, of course, for BP et. al. is at what point does demand become elastic again for oil? If you're just talking at the tank - then it is starting to even now - huge move towards cars over previous SUV's and trucks (which pisses me off... my cars are getting more expensive) but look at all the other secondary products that ARE elastic and ARE oil based - what has happened to them and their margins?
Limiting the talk of oil companies to the profits they are making right now is senseless - look at the potential mayhem this has caused for demand 3 years down the road...
BW you didn't get my point quite right
the people who drill oil are making tons of money, cuz they're drilling at the same cost, as they were before, only now they're selling it at a higher price, this is their most profitable years because they're selling it at a higher price now, you follow me so far?
Ok now these guys sell it to refineries or they refine it themselves, again the cost is the same as before but now they're just guna be selling it for more to the people who actually sell the oil to consumers, BTW i'm only talking about gas we put into cars right now, i'm not guna get into other products made outta oil and companies who a lot of the times loose money there but balance it in other sectors
anyways now the people who actually sell it to consumers might feel the pain of the people not buying, but they have not totally put a stop to buying oil from refineries, that shift hasn't been seen yet on the larger scale so the drillers and refiners are still making lots and lots of money and thus are benefiting from the high prices SO FAR....the people who sell it to consumers might feel a little itch but are still making profits, offcourse they don't want the prices to stay high for TOOO long, but they're loving it right now, as no one has yet abondoned their car, well sure a few people might have but that is not yet seen on the larger scale,
I agree with you that in the long run it might reduce demand but there are more cars on the road now than ever before in america and other countries, and no one has yet just abondoned cars, and as long as that trend lives on oil companies will love the high prices,
And btw when the time comes that gas prices are just way too high, and people abondon their cars 
invest in companies that drill, refine and sell to consumers, as other companies have to get their product at a price that's already been increased for profits 
@ Selur
No....thats what the MEDIA HEADLINE states.
The higher demand, moving more product is what gives the oil companies higher than expected returns.
Look at the financial report of BP. I wont even bother....because I know the answer already. I saw it when I studied Exxon-Mobile's Financials.
Like I said....most will believe WHATEVER headline the media prints......its sells. "EVIL OIL COMPANY, Made better than expected ...>> PROFITS/EARNINGS ! ! ! <<..(wwwwoooooooooo)"
YEa..
@ Gladiator....ok.....lets go there then dude.
"people who drill oil are making tons of money..."
prove this statement to me. How is the money being made, if it is being made.
What is the profit margin of X barrels pumped vs. whatever amount of years ago.
Drillers dont set the price. The market sets the price.
What about he 10% correction down the past two weeks. So now the oil companies LOST money ??
They know the price of oil that they will move 3 months from now. They know exactly how many contracts they can fulfill, and and what price they have ALREADY SOLD FOR !!...
people......please. Understand the market befor you try to talk about it.
Boeing is another example. They build planes already paid for. They must deliver X planes to Y airline by Z date. If they do it eary, they get a bonus. If they do it late, the pay a penalty. Period.
Boeing ALREADY has prepaid for components they will need to build these planes. ITS SET !!!.
Oil not even pumped today, is already sold.
Man o man.
Please people....please understand what you are talking about befor you talk about it.
I'm just waiting for the inevitable day, when people refuse to pay the price for oil anymore. Where I live gas prices doubled from $0.60/litre approximately $2.40/gallon in 5 years previously only going up 10 cents over 10 years. When this happened people were outraged, they were stealing gas from pumps, siphoning it from cars, etc. as a result the price dropped by 30 cents in one day. Now that was one city imagine if this were to happen worldwide. Not necessarily simultaneously but it's going to happen. You can only charge so much for what people need, or think they need, before they just start taking it.
The problem BW is that there is a group of people that want the price high, and will possibly fight to keep it there, the investment people. I am not sold on your comment at the start that the futures market will lose out with off-shore drilling, or at least not in the way you seem to think they will. There will be a short term drop as some, (either the smart or the dumb) pull out, but there will be a fight back from the market at some stage, and I don't think anyone can say which way it will go, and I would hate to be the politicians that flood the market with oil to drive prices down... there will be a lot of people out of pocket in their retirement investments...
In addition, this order doesn't release pressure on demand, the demand is still there, it increases supply.
If you are going to try and be all mr econopmics proffessor then get it rihgt, even me a n00b at economics can point this out....
Now we are worried about peoples ?retirement accounts ?
Oil stocks tumble, you get out. Bank stocks tumble, you get out. Not an issue.
Polititians ?? Flooding the market ?? Oh brother.
I didnt know "Polititians" can flood the market and crush retirement accounts. 
Increase supply, you decrease price. Simple.
Increase US Supply of its one thirst, You sure up the dollar as well.
There was a point when I said, what the hell, the US can buy its oil.
I have changed my position.
To much of an imbalance.
As to demand, ..... I said earlier Oil is inelastic. Demand will not change much relative to price that is.
you pointed out nothing.
> Black_Wing wrote:
> As to demand, ..... I said earlier Oil is inelastic. Demand will not change much relative to price that is.
you pointed out nothing.
Time for me to step in!
Oil is inelastic from a US perspective, because we depend on oil now. For an American to stop buying oil would be to stop driving, reduce electricity consumption, etc., which is critical to our style of living.
However... that doesn't mean oil is inelastic globally. For those who don't depend on oil, oil is elastic. Take, for example, a major factor that has already increased the price of oil: Chinese industrialization. A community in China can choose relatively easy whether or not they want to industrialize, because not industrializing costs nothing in the short term. Unlike American, European, and Asian markets that have already industrialized, rural regions can still reject oil. Therefore, oil is partially elastic.
A reduction in oil prices may not increase the demand from industrialized nations. But it would increase the ability of rural communities to industrialize, in turn getting those communities "hooked" on oil, converting them from elastic purchasers to inelastic purchasers, in turn resulting in a net increase in demand for oil.
Then that isn't elasticity :-p
Elasticity denotes the change in quantity demanded depending on the change in price - if a high price means they "still" don't demand oil - then nothing has changed. If a lower price means they "could" (not would) demand more oil - then nothing has changed.
At the point where their quantity demanded of oil *actually* changes based on price (say they begin industrializing at 60 dollars a barrel, but quit at 100) then they have shown oil to have at least some elasticity.
The issue, even then though - is that "some" elasticity does not denote whether demand is elastic or inelastic - it is the point at which the change in demand over the change in price is greater than 1 - which is simply not the case with oil.
For oil to be elastic, when it went up from 50 dollars a barrel to 100 dollars a barrel, quantity demanded would have had to have fallen by 100% - it didn't. Making oil, by economic definition, inelastic.
Does quantity demanded vary slightly? Of course - but that does not meet the definition of oil having reached the point on a demand curve that is price-elastic. Also - oil is oil, it doesn't really count to say "well, in these little regions of the world, oil has an elastic demand" (even if that is the case) - you must aggregate them together with the american oil monster to discover the actual elasticity still.
Additionally to the previous two points, there is not much elasticity, but the amount there is of elasticity is very limited. If a typical American has two weeks vacation, and would spend as much time driving normally during this as when at work, just in vacation, but now will not... this is 2 weeks of 52. This means the amount is less than 4% in total reductions.
Btw demand for oil has not even declined 10% which shows that it is very inelastistic.
There is a line where the prices will get to be to much, then shipping will cease, air traffic will stop, and businesses will close for the duration of the high prices. We are talking 80-90% layoff rates AROUND THE WORLD.
This will in turn do a lot of damage finally to the oil industry, which will lead OPEC to plummet prices in an effort to restart the worlds economy. Lets hope this doomsday scenario never happens however.
ok BW what i understood was that your point is, high oil prices are not benefiting oil comopanies, did i get that wrong??
cuz to counter that i said it has not come to the time where the high prices leave people to abandon cars and thus oil companies loose money
and BW the contracts they sign now, go with the current price on the market and that's definetly a benefitable one, even the old contracts were signed with a high oil price, a price higher than what it costed to drill it, so atleast so far the high oil prices have in no way been bad for oil companies
So far being the imperative phrase :-p
> windowsME wrote:
> Then that isn't elasticity :-p
Elasticity denotes the change in quantity demanded depending on the change in price - if a high price means they "still" don't demand oil - then nothing has changed. If a lower price means they "could" (not would) demand more oil - then nothing has changed.
Oooh, this is where it gets interesting. Let me take a moment to illustrate the whole idea of this theory:
Assume two nations exist in the world: An agricultural nation denoted A, and an industrialized nation denoted I, each with 100,000 people.
In a world with $20 per barrel oil, it would be easier for people in nation A to convert their communities to industrialized urban environments, as had been done in nation I. Assuming a relatively healthy global economy, 1,000 people in nation A may decide to give up their rural lives and accept factories being placed in their towns, move to more industrialized regions, or industrialize their farms, all of which increase the demand for oil.
A couple notes here: As a person crosses over from pre-industrialization to industrialization, their will to revert to pre-industrialization is probably lessened, assuming they integrate in the first place. True, a person may walk into a city, be disgusted by some aspect of urban industrial society, and immediately leave. But once you've been integrated into the society, it's hard to leave. Therefore, the short term elasticity results in long term inelasticity.
Now, let's assume that the price of oil went to $100 a barrel one year later, after 1,000 people converted to industrialization. Nation I and the 1,000 converts would have an inelastic demand. However, for the now 99,000 people of nation B, it becomes more expensive to industrialize, discouraging their purchase of oil. For some people, industrialization will be too expensive. As the price of oil goes even higher, it may be that rural economies would be preferrable to industrial economies, halting industrialization altogether.
But there's something else to note here: The added industrialization from those 1,000 people who converted puts an upward pressure on oil prices due to added long term demand. That demand is inelastic, so there's no way out of it.
So yes, long term, oil is inelastic. However, in the short term, oil has a mixed elasticity in which its price actually does influence demand.
> At the point where their quantity demanded of oil *actually* changes based on price (say they begin industrializing at 60 dollars a barrel, but quit at 100) then they have shown oil to have at least some elasticity.
The issue, even then though - is that "some" elasticity does not denote whether demand is elastic or inelastic - it is the point at which the change in demand over the change in price is greater than 1 - which is simply not the case with oil.
For oil to be elastic, when it went up from 50 dollars a barrel to 100 dollars a barrel, quantity demanded would have had to have fallen by 100% - it didn't. Making oil, by economic definition, inelastic.
Does quantity demanded vary slightly? Of course - but that does not meet the definition of oil having reached the point on a demand curve that is price-elastic. Also - oil is oil, it doesn't really count to say "well, in these little regions of the world, oil has an elastic demand" (even if that is the case) - you must aggregate them together with the american oil monster to discover the actual elasticity still.
> You're just wrong on this. A good can be both inelastic and elastic at the same time.
Take drugs for example. If the street price of a $10 drug suddenly increased to $100, would it influence demand? Yes and no.
No= Drug addicts are still addicted. They would find a way to pay for it.
Yes= New potential drug users are less likely to get involved in the drug in the first place.
Short term, inelastic.
Long term, elastic.
You have to factor in demographic groups, or else you're just dumbing down economics to the point of being useless and unrepresentative of society.
Wait for oil prices to drop more! G. W. Bush has now made Oil Shale a priority for the waning days of his administration. This is significant since the oil in Shale in the United States represents more oil than the combined proven reserves of all of OPEC!
We will see a significant change in the prices in the days to come as this fight is going to panic speculators. This creates uncertainty which will mean they will probably move to more certain markets or other developing markets. Finally relief is in sight!
Firstly, I understand your industrialization illustration just fine, no need to go further.
Secondly, it is clear that you fail to recognize both the definition and formula of elasticity according to economics.
Thirdly, aside from that, you would be perfectly correct.
lol, you're arguing perfect inelasticity - I'm arguing inelasticity. What you seem to be missing here is that we aren't talking about the word elastic as the word elastic, we're talking about it as the defined economic term - elastic.
Perfectly inelastic - quantity demanded does not change
Relatively inelastic - quantity demanded changes less than price - which is clearly the case for oil.
This isn't "Me" you're arguing against - it's simple economic definition.
As to the drugs, again, it's simple formula - look up price elasticity on wikipedia if you'd like, but I can tell you the equation right now, in its quick and dirty form (meaning we won't go into any calculus on a ludicrous internet forum):
Change in quantity demanded/change in price
If price changes, and quantity demanded does not - you have perfect inelasticity.
If price changes, and so does quantity demanded, but not as much - you have relative inelasticity (the good still being inelastic)
If price and quantity demanded change equally - you have a price neutral good
If price changes and quantity demanded changes more - relatively elastic.
If price changes and everyone refuses to buy it at all - perfectly elastic.
A good can not be "elastic and inelastic" - it either is or it isn't, in the case of economics - simple formula and definition. The issue here is that you aren't speaking in "economic terms" you're speaking in "this is how i feel about this word's definition" terms - which, given your definition, is correct.
Now, does quantity demanded change with price? Yes, but we aren't talking about "the way zarf views elasticity" we're talking definition - and in this case, oil is a relatively inelastic good.
Now, as to "not including demographics" - you started it by disallowing america to focus on chinese industrialization. Now, maybe *CHINESE DEMAND* for oil is an elastic creature - I have no math on that. However, we aren't talking *chinese demand* for oil, now are we? We're talking aggregrate and world wide quantity demanded for oil - in that, the proper measure will be the change in barrels of oil purchased in comparison to the price of those barrels.
Dumbing down economics? No, just using proper ones - now, if you want to apply economics to industrializing nations' oil demand, then you are doing it perfectly - but like I said, we're talking about the commodity oil - not the localized demand for it given a set of circumstances.
http://en.wikipedia.org/wiki/Price_elasticity_of_demand
Feel free to go here to investigate the economic view of the word "inelastic" as compared to the social view of the word "inelastic" :-p
@ Gladiator...... No, you are wrong. about the drilling.
The Oil drilled today was bought in the past. The oil delivered today, was purchased way in advance of todays date.
Corn that farmers are growing, is already purchased.
Head of cattle that a meat processing plant needs in October, was purchased today.
People dont walk to a market, and say, "OK, I will take that oil tanker in the Gulf of Mexico.......How much is it ?"
Please all. Please. Learn.
@ Windows. Spot on. wow. a breath of fresh air.
Do you realize how many people come on this specific forum, and spout off like they understand Economics ??
To many have no clue....and that is scary.
Elasticity is ECO 101. Imagine that.
>>To many have no clue....and that is scary.<< Says the biggest one of them all...
>>Dumbing down economics?<< Economics is already dumbed down anyway, how can you make it fall further?
BW: you laugh at me talking about politicians changing the price of oil? GW is a politician and he apparently has already, hence this thread.
Sure smart investors will move funds away from oil now, or at least some might, some might try and fight if they think they have more power on the market than GW does. However that doesn't mean that all investors are smart, and that all people invest indivudually. People are dumb, and as their investment compnaies fall they will start to ask where has my retirement money gone, and some of the slightly less able invrstors might point at these policies and then the mob mentality will grow.
It is only a possibility, but I think Bush has actually doomed himself even further, though maybe not... We will have to see which way the market goes in the long term. As you so rightly point out the deman is not going anywhere, in fact with an increase in supply demand will probably sky rocket again and we will be inthe same place anyway, possibly worse off as maybe the demand will sky rocket before the 'new' oil makes it to the pumps...
Also I think you still fail to understand Glad, even though he is still probably wrong...
[flame]
BW, the contracts that are signed today or in the future or even in the past, atleast a couple months in the past were all signed with oil prices being fairly high, how is that not benefitable to drillers???
and yeah winMe, it's likely to happen some time, but not right now, this is just a bump on the road and the oil companies know that, they're not too worried right now, there's millions of people in america they need their cars everyday, almost every minute of their life they're not guna give it up, not yet, and not for another 20 or so years, provided that the technology stays the same, which offcourse it won't but for now oil companies are benefiting and loving the oil prices
Cars aren't the only ones using oil 
- and, this was the original argument anyway, in case you no longer remember - that oil companies do *not* want high prices *forever* :-p
[flame]
@You_Fool
Stop it! You don't help with crap like that.
@Windows
I'll get back to you later, because this is fun. 
winME actually i think i was the first one to mention that other products are made from oil too
*my first long post* read up on it
and winME i tried to confirm, cuz the point got lost somewhere, but yeah sure companies don't want it to remain like this for 15-30 years, but they won't mind it short term, and honestly this is nothing, this is just a bump, don't think this is too high, or it will be looked back at to be low, it's is high when we compare to the past but this will always be the case....
and honestly right now drillers are loving the prices, cuz like i said no one is abandoning their cars
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