Monday, September 10, 2007

OPEC Needs an Economics Refresher

The head of OPEC says that the oil supply is just fine. It is refining that is the problem. That would put the reason for higher oil prices squarely on the doorstep of the oil companies like Exxon (XOM), BP (BP), Chevron (CVX) and others. Right? Uh no..

Let's just sit back and think about it. Let's say what they claim is true and that the supply of oil is sufficient for the current demand. Why would oil companies drive up the price they have to pay for their product? What does the refining capacity of oil have to do with the price of a barrel of crude?

Now, if we are talking about the finished products like gasoline and heating oil, then I would agree that those prices are artificially high because we do not have adequate refining capacity. If anything, the lack of capacity should lead to a log jam effect of crude oil which, according to the laws of supply and demand, would cause the price of oil to drop. The jam would be caused by increasing demand and production being forced through the same refining funnel, the oil would have to back up into the cup of the funnel as it waited to be refined. If what the OPEC head said was true, this would undoubtedly happen, yet, the oil price just keeps marching higher and right now we have no additional wars or natural disasters on anyone minds. Hmmm.

It is kind of like egg producers saying that the price of eggs are high because not enough diner cooks make scrambled eggs it, no it is high because the demand is straining supply.

Just like oil... Econ 100..

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