Posts Tagged ‘crude price’

The Price of Anything

Thursday, March 10th, 2011

Dear Friends,

It seems to me, that everyone who has grown up in a market based economy, should have a basic understanding of the way supply interacts with demand, to reach a price equilibrium, and that if demand is reduced, cost goes down and if supply is reduced, cost goes up. But I run into more and more people, who profess no knowledge of this economic law whatsoever, and maintain that it is totally the oil companies that set the price of gasoline.

The supply, real and perceived, of any thing, not only commodities, is a factor in it’s economic value. The value of gold is high because the supply is very limited and the demand, for all uses, is great. The value of a thing is not determined by it’s utility, water for example is usually cheap, because it is plentiful, but put a person in a desert for a day, where it is not plentiful, and he or she will pay a fortune for it. This is another example of the relationship between supply and demand.

The Obama administration, has at every turn, made decisions that will lower the supply of crude and coal. From changing drilling regulations and outright bans on drilling to curtailing coal production the administration has proven it’s willingness to raise the price of energy to protect the environment. This is one of the planks of their platform. Energy prices will necessarily rise… To make renewables competitive with dirty energy.

Due to a hoax. The hoax of anthropomorphic global climate change. They changed the name from warming to change, because they aren’t sure if the planet is still warming or cooling, so the name, change. The global warming we have experienced from 1959 to 2008, (or sooner) has been mirrored on Mars with a congruous shrinking of the Martian polar ice caps. The predicted warming has not materialized here however. It seems to have leveled off. But what it all boils down to is this, they don’t know if the planet is warming or cooling, they don’t know the mechanism of it’s warming or cooling, but the one thing they are sure about, is that it is our fault.

With a hoax in hand they have sought to shrink the ability of the market to meet short term supply interruptions. Take bobby pins, say there are 4 factories running at 50% capacity, meeting the demand for bobby pins. Now take one factory down, perhaps from a fire, what will happen to the price of bobby pins? Probably nothing… the remaining factories can ramp up production to meet the increased demand.

Take the same example but the 4 factories producing bobby pins are now running at 100% of capacity. Take 1 out, from a fire, and now what happens to the price of bobby pins? The price necessarily skyrockets. It is necessary because, the factories remaining cannot ramp up production, they were already at 100% of capacity. So the price will rise to a new equilibrium. Higher then you would think due to the perception that the supply of bobby pins is now at risk…

The result, of the administrations decisions, is that the US is producing far less oil and coal than it could. If the US was producing even 10% more, than it is now, there would be a dampening effect on global prices. But with a hold on US oil sands, coal to oil, intractable permitting for coal, nuclear and most of the US’s coastline off limits, the US government, under this administration, is intentionally lowering the ability of the US to produce energy. This puts not only the citizens of the US at risk but the citizens of the world.

Economic production is tied to energy prices. The single biggest factor in the rise in the economic production of the worker, since the industrial revolution, is the leveraging of his or her productivity, with mechanical power. This leveraging has led to the rise in the standard of living in countries that participate in a market economy. The application of mechanical power makes the price of energy a major portion of any economic player’s cost structure.

Now that the ineptitude of this administration, has set the Middle East and North Africa on fire, like a child with a matchbook, the supply of oil in the world is being interrupted. Overtly undermining Momar has led to him setting oil wells on fire, even a hint of unrest in Saudi Arabia will drive the price of crude to $200.00 a barrel, (from Bloomberg Radio) and the continued unrest in Egypt and Tunisia is leading to a possible flood of refugees. How will that effect the world economy?

But people keep insisting it is all the oil companies…