bmcgreggor

Why Is Oil So Expensive?

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Why is oil almost 60$ a barrel? Is it because of the chaos of the Middle East? Or because of Environmentalist restrictions on just about everything realted to the energy industry? Or both?

It keeps going up. I know that supply and demand determine the price but political factors determine supply and demand. So I am looking for an explantation as to why it has skyrocketed over the last couple of years and if there is any chance of a reversal.

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So I am looking for an explantation as to why it has skyrocketed over the last couple of years and if there is any chance of a reversal.
I would look at patterns of consumption in Asia as a cause of extraordinary demand, as a first step to the explanation. Environmental restrictions on expanding refinery capacity explain why production can't meet that demand. And that's all she wrote, folks.

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I would look at patterns of consumption in Asia as a cause of extraordinary demand, as a first step to the explanation. Environmental restrictions on expanding refinery capacity explain why production can't meet that demand. And that's all she wrote, folks.

For anyone: What is the current inflation-adjusted price of crude oil compared to, say, 30 years ago? Has inflation had an effect on the nominal price of crude oil?

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For anyone: What is the current inflation-adjusted price of crude oil compared to, say, 30 years ago? Has inflation had an effect on the nominal price of crude oil?
As I understand it, prices up to the '73 embargo were fairly flat at about $18/barrel in inflation-adjusted dollars, then rose for about 7 years spiking because of the Iranian revolution and the Iran-Iraq war, fell to around $21 by '86, then fluctuated going to what looks like an all-time low by '98, and have gone up since. If you compare to the early 80's, the price is a bit higher. (These are "inflation-adjusted" figures, raising the issue of circularity. How do you compute the inflation adjustment? Does it equate dollars to standard commodities like gold -- no, that would be heretical -- or petroleum? So the price increase might be more, if crude prices have a significant influence on the inflation computation).

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Why is oil almost 60$ a barrel? Is it because of the chaos of the Middle East? Or because of Environmentalist restrictions on just about everything realted to the energy industry? Or both?

It keeps going up. I know that supply and demand determine the price but political factors determine supply and demand. So I am looking for an explantation as to why it has skyrocketed over the last couple of years and if there is any chance of a reversal.

If you think oil is expensive, how much do you think a barrel of spring water would cost?

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What is the current inflation-adjusted price of crude oil compared to, say, 30 years ago? Has inflation had an effect on the nominal price of crude oil?

The Washington Post had a graphic on this the other day [HERE].

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If you want to know what happens with a barrel of oil, click here:Oil Barrel

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If you think oil is expensive, how much do you think a barrel of spring water would cost?

To answer my own question, a barrel is 42 gallons. I purchases 16 oz of water in a bottle for about $2. This equals $672 per barrel for water!!! Milk is about $4.50 per gallon = $189 per barrel.

So let's keep so context, something modern politicians are unable to do.

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Now that you've seen what comes out of a barrel of oil (my post above), one of the factors affecting the price of any one particular product is the competition among the other products for their share of that barrel. So, just because more or less oil comes out of the ground, doesn't mean the price of gasoline necessarily goes up or down.

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To answer my own question, a barrel is 42 gallons.  I purchases 16 oz of water in a bottle for about $2.  This equals $672 per barrel for water!!!  Milk is about $4.50 per gallon = $189 per barrel. 

But is this method of estimation a valid one? On the open market, aren't prices proportionately lower as the quantity rises? In other words, what would be the price if you bought one gallon of crude oil (if you could find it locally) -- and then multiplied it by 42 (gallons)?

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But is this method of estimation a valid one? On the open market, aren't prices proportionately lower as the quantity rises? In other words, what would be the price if you bought one gallon of crude oil (if you could find it locally) -- and then multiplied it by 42 (gallons)?

I think it is not a valid method of estimation. There's the problem you suggest, and also the fact that the price for this "spring water" is a retail price, which includes packaging in small containers, whereas the oil price most people quote is a price on the commodity exchange - where oil is traded in lots of I think 1000 barrels.

Furthermore, this is pretty expensive water being talked about. Where I live, the incremental cost for an additional 100 cubic feet (almost 750 gallons!) of water is about $1.50 or a little less. Per barrel, that works out to be about 8 cents.

Anyway, I don't know what the original point of the oil vs water comparison was. Today the price of oil is higher than it would be if the environmentalists were not restricting its supply. (And also restricting the supply of all other useful forms of energy needed in an industrial society.) That point is true regardless of what the price of another, unrelated commodity like water happens to be: whether it's 8 cents or 80 dollars.

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Today the price of oil is higher than it would be if the environmentalists were not restricting its supply.
This is so, but since crude is about $1.42 a gallon, taxes are about 45 cents/gallon and refining and distribution are about 40 cents/gallon, the added production cost created by environmentalists is still much lower than the tax burden. Getting rid of the taxes would drop the prices much more than removing environmental restrictions (of course, the solution is to do both).

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This is so, but since crude is about $1.42 a gallon, taxes are about 45 cents/gallon and refining and distribution are about 40 cents/gallon, the added production cost created by environmentalists is still much lower than the tax burden. Getting rid of the taxes would drop the prices much more than removing environmental restrictions (of course, the solution is to do both).

But how do you know that the tax burden is higher than the costs added by the environmentalists?

In other words, how much of that $1.42 price of crude is due to environmental restrictions on the production of oil? And how much of the refining cost is due to environmental restrictions? The ecofreaks might be causing these prices to be higher by an incremtal amount that is higher or lower than the tax burden.

I don't know the answer to either of these questions, but I expect that the price of crude oil would be much lower without the environmentalists. Consider just these facts:

1. There are huge areas in the US that contain oil, but are off-limits to oil production. That bit of Alaskan tundra comes to mind, as does the land off the shores of many states, including California and Florida. If producers were free to produce oil from there, how much higher would the supply be, and how much lower would the price be?

2. There have been no nuclear power plants ordered (that were subsequently completed) since the 1970's in the US. The environmentalists have completely stopped the construction of new reactors. As it is today, about 20-22% of our electricity is generated in about 100 nuclear reactors. If it weren't for the environmentalists, there would be many more of these plants, and electricity would be cheap. Cheap enough to use to make other fuels. No doubt some of this energy would end up being used to run cars and trains, where today we use petroleum products. That would mean less demand for oil: how much less, and what effect would it have on the price?

There are other examples of the damage done by the ecofreaks: no new oil refineries constructed for years, for instance. What do they all add up to? All I can say is that the prices of energy are higher today because of these anti-industrial people, but I can't say how much. Maybe somebody has studied the question and has a number, but I myself have no idea how much lower the crude oil price would be today without environmentalism.

(In fairness to your point about taxes, however, I should also point out that the total tax on a gallon of gasoline is probably much more than 45 cents. That figure sounds about like what's explicitly added on to the fuel, but oil companies themselves also pay all kinds of taxes in every step of its production. So one could also ask: how much of the price of crude oil is going for taxes, before it even gets refined into gasoline?)

Anyway, I'd be glad if taxes on energy production and consumption were cut OR if environmentalists became extinct; either would be a step in the right direction. :D

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I purchases 16 oz of water in a bottle for about $2.  This equals $672 per barrel for water!!!

I buy cases of 35, 0.5 liter water bottles (Ice Mountain) from Costco for under $5. A liter of water is 1 kilogram, so that's 0.5 kilos per bottle, or 17.5 kilograms of water per case, or about 617 ounces of water (incidentally, type "17.5 kilograms to ounce" in google, their parser engine will do the conversion for you, as well as other math expressions - kinda cool.) Even at $5/case that's $0.008/ounce, or about $0.13 for 16 ounces. Basically you're paying over 15 times more per ounce that I am. I suggest you shop around :D

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I buy cases of 35, 0.5 liter water bottles (Ice Mountain) from Costco for under $5. A liter of water is 1 kilogram, so that's 0.5 kilos per bottle, or 17.5 kilograms of water per case, or about 617 ounces of water (incidentally, type "17.5 kilograms to ounce" in google, their parser engine will do the conversion for you, as well as other math expressions - kinda cool.) Even at $5/case that's $0.008/ounce, or about $0.13 for 16 ounces. Basically you're paying over 15 times more per ounce that I am. I suggest you shop around :D

I quoted the retail price for water in a store when you've been walking around all day and are dying for a drink. I prefer water from the tap: $0.000 per gallon. Sounds like that's what you're getting for $0.008 per ounce. :D

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But is this method of estimation a valid one? On the open market, aren't prices proportionately lower as the quantity rises? In other words, what would be the price if you bought one gallon of crude oil (if you could find it locally) -- and then multiplied it by 42 (gallons)?

For a simplified calculation, if all the crude oil was converted to gasoline, then $2.50 per gallon of gasoline would be $105 per barrel. So we're getting a bargain at $60.

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I think it is not a valid method of estimation.  There's the problem you suggest, and also the fact that the price for this "spring water" is a retail price, which includes packaging in small containers, whereas the oil price most people quote is a price on the commodity exchange - where oil is traded in lots of I think 1000 barrels.

Furthermore, this is pretty expensive water being talked about.  Where I live, the incremental cost for an additional 100 cubic feet (almost 750 gallons!) of water is about $1.50 or a little less.  Per barrel, that works out to be about 8 cents.

Anyway, I don't know what the original point of the oil vs water comparison was.  Today the price of oil is higher than it would be if the environmentalists were not restricting its supply.  (And also restricting the supply of all other useful forms of energy needed in an industrial society.)  That point is true regardless of what the price of another, unrelated commodity like water happens to be: whether it's 8 cents or 80 dollars.

The point I was trying to make in the oil vs. water comparison was to show that there is a psychological element that makes people overly concerned about the price of one product out of relation to the price of other products. I don't mean to imply anything about the people in this thread, but I think that the public in general seem to more concerned about the absolute dollar value of a product rather than thinking about the units involved or a comparison with other goods that are normally purchased in the marketplace.

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I quoted the retail price for water in a store when you've been walking around all day and are dying for a drink.  I prefer water from the tap: $0.000 per gallon.  Sounds like that's what you're getting for $0.008 per ounce.  :D

No, a 0.5 liter bottle of Ice Mountain from my refrigerator is (1) far better tasting than tap water, including water that came through my faucet filter and (2) pre-chilled and highly portable. :D

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...the public in general seem to more concerned about the absolute dollar value of a product rather than thinking about the units involved or a comparison with other goods that are normally purchased in the marketplace.

"Public concern" over $60/barrel oil is not over the wholesale price as such, but the relative effect on our standard of living and the economy. The numerical value of the price of oil per barrel is only a standard of reference that can be referred to in concrete form. The comparison between the price of milk and oil per gallon or the changes between them are not relevant to the huge quantities of oil required to keep the economy going or the quantities of oil and gasoline most of us consume for transportation and heat. The milk/oil comparison has become a diversion based on irrelevancy.

Regarding the taxes on oil: there is much more involved here than the taxes you see buried in the price of gasoline. From the very beginning of the production process oil companies pay enormous "royalties" to government (which ironically also happen to be the source of funding for Federal and much state land acquisition, but that is only a small part of the taxes that go into the Federal General Fund). The oil is taxed as "royalties" because even the US government long ago nationalized much of the source of crude oil, specifically off shore and in Alaska (where less than 1% of the land is privately owned).

As for the recent changes in price, there are many factors forcing prices up. The viros not only obstruct crude production, restricting the supply required for increasing demand, but also directly add to the costs of what is produced; viro regulations causing many different kinds of gasoline required under different state laws add to the complexity and costs of refineries; viros obstruct the construction of new refineries; viro regulations on other forms of energy put more of a burden on oil than would otherwise be the case (they intend to shut down coal completely and we know what they did to nuclear); viros are also obstructing natural gas as a modern substitute for much use of oil; wholesale oil prices are controlled by government monopolies where there is political turmoil, including Latin America as well as the mid-east; there is increasing demand for oil from China, especially, as well as elsewhere in the far east.

Perhaps some economist can sort this out for us to explain the specific recent large increases, which of course was the original question that none of us has been able to answer.

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---------------

Perhaps some economist can sort this out for us to explain the specific recent large increases, which of course was the original question that none of us has been able to answer.

I thought the answer to this was previously discussed. The increased demand from China has caused the price to increase.

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I thought the answer to this was previously discussed.  The increased demand from China has caused the price to increase.

That is one major source, and has been for some time. Taken together with all the rest I don't know what, if anything, is the primary reason for what seems to be a recent sharp increase within the trend.

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That is one major source, and has been for some time.  Taken together with all the rest I don't know what, if anything, is the primary reason for what seems to be a recent sharp increase within the trend.

Expectations of increases in demand produce additional increases in prices beyond those created by demand. It takes a while to stabilize as the price will fluctuate up and down around some price for a while. There's a lot of political events in the world that also affect the price on a daily basis.

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Regarding the taxes on oil: there is much more involved here than the taxes you see buried in the price of gasoline.  From the very beginning of the production process oil companies pay enormous "royalties" to government (which ironically also happen to be the source of funding for Federal and much state land acquisition, but that is only a small part of the taxes that go into the Federal General Fund). The oil is taxed as "royalties" because even the US government long ago nationalized much of the source of crude oil, specifically off shore and in Alaska (where less than 1% of the land is privately owned).

This is slightly misleading, royalties are only paid to the government if they own the land where the oil is extracted. If the land is privately owned, royalties are paid to the private landowner. Federal and state governments always get a standard 12.5% royalty interest on their oil and gas leases. The standard royalty on a private lease is usually 15%, sometimes as high as 20%. Whoever the owner, royalties are paid to them.

The question of whether the government should be allowed to own land and directly profit from oil and gas production is another matter altogether.

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I wrote: "the US government long ago nationalized much of the source of crude oil, specifically off shore and in Alaska (where less than 1% of the land is privately owned)." How is that misleading?

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