Fuel Costs

[Nashwan]

Look up the amount of oil transactions using the same years as your graph.

The "increase in demand" was mostly artificial.   

Demand is the amount of oil burned or put in storage. Adding middlemen does not increase demand.

When the world economy grows so does demand for oil. Richer people take more holidays, buy more goods, drive bigger cars further. All that uses more oil

2005, 2006 and 2007 saw almost unprecedented global economic growth. The world economy was growing by 5% a year. That pushes up demand for oil. Oil production hardly grew at all.

The past couple of "bubbles" (tech, real estate) created an incredible amount of wealth with no basis in reality, and all of it didn't cease to exist when the bubbles "popped".  People needed somewhere to park all that money, and oil was it.

There's a problem with the idea that "investment" in oil pushed the price up. You can't invest in something if you burn it.

Nobody was buying tech shares and houses and burning them. Oil was being produced, and consumed, at a rate of about 85 million barrels a day. Stockpiles of oil were not increasing. So how do you invest in something that gets burned and leaves only gasses released in to the atmosphere? What's the value in a barrel of oil that doesn't exist any more?

The price of oil went up because demand increased and supply didn't. It's as simple as that.

The simple theory of supply and demand doesn't work in this case.

It works perfectly. Ask any economist what they would expect to happen to the price of a commodity if demand rose and supply remained the same. Simple theory of supply and demand will tell you the price will rise.

[Urchin]

If oil wasn't bought and sold as futures, you'd be right. 

Problem is, it is. 

So increasing the number of middlemen buying and selling oil increases the price, even though there is no substantial increase in true demand. 

It works like the housing bubble did.  You really think there was a large enough increase in housing demand to push prices up by 200% in places?  If you do, you are a fool.

[Nashwan]

It works very differently from housing.

Oil futures are a way for oil producers and consumers to offset risk. An oil company knows it will have X barrels of oil to sell in December, but doesn't know what the price is. A futures contract enables them to sell it now for December delivery.

The same is true for buyers. An airline might want to lock in a price for their fuel in December.

Speculators will buy and sell futures, taking on the risk themselves.

Imagine a simple trade. The oil company sells 1 million barrels for December delivery. The price now is $75, they sell the December contract at $80.

The speculator pays $80 a barrel for December delivery. What happens in December? The speculator doesn't want the oil, he wants to sell the oil. If the spot price in December is $85 a barrel he has made $5 million. If the price is $75 he has lost $5 million. But come December he is in the same position as every other oil seller. He might want $85 a barrel, he'd really like at least $100 a barrel, but he has to sell for the current market price. He has no more way of fixing the price he can sell at than the oil companies who are also selling oil at the same time.

To believe speculators can raise the price you have to believe they know some secret way to sell oil for more than it's worth, and that the oil companies don't. Or that the oil companies are actually altruistic and sell oil for less than they could, just to help out the customer.

As to houses, they work very differently. You might buy a house for speculation, but you don't then burn it to keep warm. The house remains. It's an asset, not a consumable.

There is a way speculators can turn oil in to an asset, and that's to actually take delivery and store it. The speculator buys oil and removes it from the market. That has an effect on price because he's reducing supply. There is less oil for the consumers and so price goes up.

Of course, when he comes to sell the price goes down, so the net effect to the consumer is zero. And people weren't removing oil from the market in any quantity during the boom of the last few years. There was no meaningful increase in stockpiles.

[Heater]

Ride a bike...problem solved:)

[SEraider]

The speculator pays $80 a barrel for December delivery. What happens in December? The speculator doesn't want the oil, he wants to sell the oil. If the spot price in December is $85 a barrel he has made $5 million. If the price is $75 he has lost $5 million. But come December he is in the same position as every other oil seller. He might want $85 a barrel, he'd really like at least $100 a barrel, but he has to sell for the current market price. He has no more way of fixing the price he can sell at than the oil companies who are also selling oil at the same time.

To believe speculators can raise the price you have to believe they know some secret way to sell oil for more than it's worth, and that the oil companies don't. Or that the oil companies are actually altruistic and sell oil for less than they could, just to help out the customer.

 

I do not want to ignore your entire post but I will focus on this part if you don't mind.

In 2007 winter season, Citibank bought a large amount of barrels and held it off the market (according to 60 minutes), this moved the "supply" down and holding these millions of barrels off the market. 

So while you state that speculators cannot set prices, they could influence the supply chain to help achieve their eventual goal of satisfactory prices they would "want" to sell it for.

This is why I believe that supply and demand forces takes on a different form with the most wealthiest that have that power to manipulate supply.  Thus hurting the world economy and hurting our industrial output.

If I can throw another wrench in this whole thing:  If free markets truley do work, why then are auto mfg's unable to release electric or various forms therof of non-petrol vehicles to create the 'competition' in free markets that it was intended to?  The answer is money and oligarchy. 

Demand is predermined - Supply is manipulated. 

[Nashwan]

In 2007 winter season, Citibank bought a large amount of barrels and held it off the market (according to 60 minutes), this moved the "supply" down and holding these millions of barrels off the market.

Yes, it happens from time to time. It's worth pointing out the scale, though. The world uses about 85 million barrels a day (or did before summer 2008). The largest oil tankers hold about 4 million barrels.

Overall stockpiles didn't go up substantially during 2005 - 2008.

So while you state that speculators cannot set prices, they could influence the supply chain to help achieve their eventual goal of satisfactory prices they would "want" to sell it for.

You can certainly manipulate the price if you stockpile oil. That's reducing supply. But when you come to sell you are increasing supply, which pushes the price back down again.

This is why I believe that supply and demand forces takes on a different form with the most wealthiest that have that power to manipulate supply.  Thus hurting the world economy and hurting our industrial output.

You get speculative movement every day. But over the longer term the world was consuming every barrel of oil produced. The price was correct.

If it hadn't been, if oil had cost more than it should, the result would have been a surfeit of oil on the market as the high price would have reduced consumption.

If I can throw another wrench in this whole thing:  If free markets truley do work, why then are auto mfg's unable to release electric or various forms therof of non-petrol vehicles to create the 'competition' in free markets that it was intended to?  The answer is money and oligarchy.

The technology just doesn't exist.

If you take battery cars as an example, you need about 40 kw/h of batteries to power a family car for about 125 miles. That battery pack costs around $30,000. It has to be replaced every 100,000 miles or so, meaning the replacement cost of the battery is about 2 - 3 times as expensive as gasoline.

Oil is a very good store of energy. Crude oil (and gasoline) have about 12.8 kw/h of energy per kg. A car battery has 0.04 kw/h per kg.

And oil is just lying there under ground, ready to be used. It can be easily transported and stored. It's the ideal fuel for vehicles.

There's nothing that can compete with oil at the moment. Batteries cost more and are less convenient.  Natural gas has to be compressed and stored in expensive tanks. Overall it costs more. Hydrogen has to be made from natural gas, compressed and stored in even more expensive tanks, and costs much more. Compressed air doesn't store enough energy to power the sort of vehicles people want.

People use oil powered vehicles because they are cheaper and better than the alternatives. That's true even in Europe where taxes raise the price of fuel to $8 a gallon. People drive smaller, more efficient cars, but they are still powered by gasoline and diesel.