speculators now hold up to 45 percent of all oil contracts — three times as many as at the turn of the millennium.
But what do the speculators do with the oil? At the end of the day, they either have to take delivery of the oil and store it, or sell it.
Speculators could be really distorting the market if they were stockpiling oil, but they aren't. With oil selling for $120+ a barrel, consumption is roughly equal to production.
If prices were lower, consumption would be higher. Higher consumption isn't possible without higher production.
To some extent demand is inelastic, even at $120 bbl, but given the huge percent that hinges on US transportaion fuels and our inefficient choices in automobiles in the 1990s when prices were exceptionally low that is very elastic in coming months/years.
That's true, and I think oil demand will fall, and prices with it.
These prices are also binging more and more production on line, both traditional and non-traditional.
But will the new sources even offset the decline in existing fields, let alone lead to increased supply? The North Sea is down 2 million barrels a day from peak, and likely to decline another 10% this year. Russian oil production actually declined in the first quarter of this year, rather than increased as forecast. Mexican production is falling fast. Venezuela, which had been forecast to increase production for years to come, is experiencing major declines.
Granted politics and mismanagement plays a part in the declines in some countries, rather than a lack of reserves, but that doesn't make the declines any less real.
The world has to add a lot of production each year just to make up for the declines in existing sources. In the last couple of years the US has added new production, but that's only halted the long term decline in the US, it hasn't actually increased total production from the 2006 figure.
I knid of doubt that OPEC and others cannot physically meet international demand increased 7 years after the need was identified, given the relatively small percentage of increased demand.
Opec did increase production quite dramatically several years ago, from 31.9 million barrels per day in 2003 to 36.1 million in 2005. Opec production actually fell slightly in 2006 and again in 2007 (according to the EIA). I doubt they lack the reserves to increase capacity, but I suspect they might lack the ability to exploit those reserves.
OPEC itself is starting to get freaked out and apparently will be working with other producers to do something about production. As Beutel told me, this is a potential disaster for them because the counter swing will likley not be all that pretty when the bottom falls out.
That's one of the worrying signs. The price of oil has increased far above the target OPEC set, to a point where it is leading to major demand destruction. OPEC still haven't acted to increase supply.
The jump from $60 to $120 or more is simply not related to a supply and demand equation. Those variables haven't really changed all that much during the same time.
If it's not related to supply and demand, where is the oil going? If consumption = production at $120 a barrel, how could consumption = production at, say, $80 a barrel, unless production increased?
I don't see a way for the price to be out of line with supply and demand in the long term unless stocks are increasing, or unless oil consumption does not decrease with price. Demand is certainly inelastic to some extent, but not totally. Stocks are not increasing, in fact they have declined slightly over the last year.
