Friday, July 11, 2008

Supply and Demands

Abdalla Salem El-Badri, left, the OPEC secretary general, met in April with President Mahmoud Ahmadinejad of Iran. (Morteza Nikoubazl/Reuters)

The head of the Organization of Petroleum Exporting Countries warned Thursday that oil prices would see an "unlimited" increase in the case of a military conflict involving Iran…

"We really cannot replace Iran 's production - it's not feasible to replace it," Abdalla Salem El-Badri, the OPEC secretary general, said during an interview.
—James Kanter, IHT
Gasoline is just under $5.00 a gallon in some parts of the United States and you’re probably driving less, I know I am, do you still believe in the theory of supply side economics?

I’m thinking that current gasoline prices have very little to do with the supply of oil and a lot to do with demands made by oil producing Nations. (see here)

OPEC pumps about 40% of the world oil supply which seems to make them feel that they are entitled to make demands on the world! Its supply side economics gone jihad, here’s why I say that.

OPEC just pronounced that if there is any attack on Iran gas prices would raise precipitously without any restraint. This somewhat oblique warning seems to test just were the balance of world power resides. Given that there has been no equal warning or restraint demanded on Iran’s calls for Israel’s destruction by President of Iran Mahmoud Ahmadinejad.

No longer should there be any doubt as to who is in control of the world. Oil is the life’s blood of the world and in a not so veiled threat OPEC has declared its protection of Iran and demands that those who threaten Iran back off.

So it would seem that it is OPEC that is controlling the price of oil in world markets and equally it would seem that they are at fault for the high gasoline prices in consumer nations, but not so says OPEC.

OPEC has been saying, as early as 2007 that increased oil supply will not bring the price of gasoline down. OPEC says there are causes for high gas prices other than supply and demand.

As reported in October 2007 in the International Herald Tribune representatives from top oil producing countries Tuesday blamed the steady advance of oil toward $100 a barrel on a combination of financial speculation, geopolitical instability and a shortfall in refining capacity.

The president of OPEC, Mohammed bin Dhaen al-Hamli, who is also the oil minister of the United Arab Emirates, pledged to keep markets amply supplied. But at an oil industry conference in London, he said there was only so much OPEC could do in the current circumstances to keep a lid on prices.

"Increasingly oil markets are being driven by forces beyond OPEC's control, such as geopolitical events and the growing influence of financial investors," Hamli said. "We are of course concerned about the high level of oil prices."

This directly contradicts proponents of supply side economics. According to CNN crude oil prices are driven largely by fluctuations in the global supply and demand.

Gas price increases in recent years have been due in part to crude oil production limits set by the Organization of Petroleum Exporting Countries, or OPEC, and rising demand across the globe, especially in countries like China and India. Instability in key oil-producing countries can also affect the supply of crude oil.

The purchasing power of the dollar also has an impact because oil is bought in dollars in every world market. If the dollar is cheaper against foreign currencies, U.S. consumers will pay more at the pump.

In addition to that in 1999 OPEC worked to convince all oil producing nations to cut the world supply of oil by 3%
With remarkable speed and unity, OPEC clinched a far-reaching agreement with four independent oil-producing nations today to cut world output by 2.1 million barrels a day. The move, if carried out, would significantly reduce the supply of crude oil and drive up the price of gasoline and other fuel.

The pact, announced here, is to take effect on April 1 and last for a year. It would reduce daily world oil production of 70 million barrels by about 3 percent.

The deal was reached despite resilient skepticism about the Organization of Petroleum Exporting Countries' ability to stop cheating by its own members. On the contrary, there is now considerable optimism that the cutbacks will work.
One would think that if OPEC believes that cutting supply would raise the price of oil then increasing supply would lower prices.

This too, OPEC controls the output of its members through a production quota system designed to influence the price of oil. Quotas are set at regular meetings.

But contrary to the reality of what is happening Saudi economist Ali al-Dakkak said world prices were being driven by "wild speculation" and a lack of refining capacity in consumer countries, especially the United States.

Al-Dakkak adds, "Consumer demands for increasing output are politically motivated." —Worldnews Australia

Consumer demands for increasing output are politically motivated? And here I thought that not being able to drive my car and feed my family at the same time motivated me and millions of American consumers of gasoline to demand more output of oil, silly me!

In Venezuela gasoline is $0.12 a gallon in Kuwait it is $.078 a gallon, in Saudi Arabia it is $0.91 a gallon so why doesn’t fluctuations in the global supply and demand affect these prices to the extent that the U.S. prices are affected? (see here)

I’ll tell you why because it is just the reverse of Saudi economist Ali al-Dakkak’s statement, the exorbitant increases in oil and gasoline prices are politically motivated not the other way around.

Finally there has been a 25% reduction in combined expenses to produce oil for the OPEC nations and a 181.15% increase in price to consumer nations that’s a 206.15% increase in profitability over the period 2000-2007 to April 2008 (see here)

This means that lower cost to produce the oil, higher profits based on higher pricing and political posturing point to OPEC manipulation of oil supplies and prices to make demands to control world events and world politics which is very bad for the Western world.

A virtually new OPEC spin on supply and demand to the Western world. "If you don't do what I demand, then I won't supply the oil that you need!"

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