The price of a barrel of oil - all a conspiracy?

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RMCF

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Perhaps I'm just being a bit of a conspiracy theorist, but the price of a barrel of oil and in turn home heating oil/petrol/diesel etc has baffled me recently.

When it was sky rocketing up around $150 a barrel, we were told it was going to reach $200 without any doubt.

Yet it stopped and has now, in a few short months, dropped dramatically to less than $50 a barrel.

How can this happen? I heard on the radio today that its due to the credit crunch and the fact that there's not the same demand for oil. Surely this is nonsense. I am using the same amount that I always did at home and in my car. In fact the weather is getting colder so we are all using more heating oil. And surely we will all be buying oil for the winter? I have asked a few work colleagues and they are the same. None are saying that they are driving any less or switching off their heating. And I am sure that worldwide, although there may be some reduction, by the laws of simple economics and supply & demand, its not anywhere near enough to account for a barrel to drop to a third of its price in 8 weeks.

Some will say it was oil speculators selling their stock to the world market, but again I'm not buying that.

I think that for a while the worlds Gov's and OPEC were happy to fleece us and take the massive profits and taxes, but now that the world is in near-collapse they have got together and said, "lets knock the prices down or the masses will get angry".

Thoughts?
 
Oil is a finite resource with a long term trend of increasing demand. => Long term price will rise.
In the short term we are facing a world wide recession, that means a reduction in use and demand and hence a reduction in the price.

The amount it drops/rises by are related to the market (discussed above) and OPEC, so in a way you are right, There is a conspiracy, as in OPEC can agree to cut production keeping price high but it's not like that's news.
 
RMCF said:
Some will say it was oil speculators selling their stock to the world market, but again I'm not buying that.
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Either is anyone else... hence the problem.

Oil is such a valuable resource and a bell weather for the world economy that it’s price is driven by fear and hysteria more than logic and reason (though some people buy and sell using logic and reason to predict the fear and hysteria that drive the market).
 
RMCF said:
we were told it was going to reach $200 without any doubt.
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Without a doubt? Goldman Sacs issued a forcast indicating that they believed oil would rise to $200. Few other 'experts' committed themselves to such a high figure. Indeed many such as Michael O'Leary (who'd previously forecast wrong) said it was a sure bet that the price would collapse. In free markets there is no such thing as a sure bet in the short term.

RMCF said:
I am using the same amount that I always did at home and in my car.
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No you are not, oil demand has stopped rising and may have receded in recent months in most western countries as utilities and businesses try to contain energy bills. Many utilities have switched to other fossil fuels such as coal and gas to generate the electricity you use at home. A stream of renewable projects have come on stream worldwide and a greater emphise on energy efficency has seen may firms reduce total consumption (including things you use every day such as mobile networks and internet firms). The combined drop in demand may be only 1% or less in some markets, but it is still enough to influence the price of oil dramatically.

RMCF said:
In fact the weather is getting colder so we are all using more heating oil. And surely we will all be buying oil for the winter?
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Haha! Do you not think this happens every year? The oil market doesnt react to things it knows for certain and it is certain to be cold in the winter and warm in the summer in the Northern Hemisphere. Unless it is unusually cold, then markets wont react. And to be honest in some countries electricity usage is higher in summer than winter because of air conditioning. Plus it is not cold in Australia, Argentiana or South Africa in Winter!

RMCF said:
its not anywhere near enough to account for a barrel to drop to a third of its price in 8 weeks.
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Oil markets are so finely balanced and supply takes so long to develop that a 2-3% demand change either way can have massive reprecussions for price.

RMCF said:
Some will say it was oil speculators selling their stock to the world market, but again I'm not buying that.
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I don't even understand this sentence!
 
CGorman said:
Oil markets are so finely balanced and supply takes so long to develop that a 2-3% demand change either way can have massive reprecussions for price.
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It is also worth noteing that he oil production curve follows the demand curve but laggs by up to a few months. In other words it takes time to get more oil into the market as it has to be extracted, refined and shipped. In the Middle East it costs very little to get a barrel from the ground to a refinery, the cost of extraction can be as low as $7 a barrel, but in the North Sea and much of Russia it can cost much more than this. Therefore as oil prices increase more wells become commercially viable (this can be seen clearly in places like LA where small “Nodding Donkey” wells can be shut down for years at a time but turned on again when prices reach X price). These wells are kept open as long as the price is high enough but they close when the price drops below the level at which they are commercially viable, thereby reducing supply and stimulating price.
When people talk about oil reserves they should qualify that by saying that there is X amount of oil available at X price but Y amount of oil available at twice X price.
 

I dry lined my walls and put thick insulation in my attic, so I'm using a lot less heating oil than last year.

I'm sure a lot more people are doing the same due to wanting to be greener and the new energy rating on houses that come into effect in 2009.
 
The market sets the price. You had alot of speculators buying oil over the past year and now they are selling it because they see a reduced demand due to a possibility of a long term world wide recession.

You can buy and sell oil or most comodities without ever touching it. It's a paper transaction.

Now that the price is low you could assume that there is a plentiful supply of oil. The truth is that nobody really knows how much oil is burried in the ground. The price is what the market is willing to pay for it.
 
Maybe its just me but I would absolutely love to buy 1 barrel of crude oil and bring it home.
Just to put in the back garden and look at and show off to my friends.
They'd say, "Whats that there Teabag" ?
And I'd say "Oh thats just me barrel of Brent crude oil, I picked it up for $50 last year, haven't you got one ?"
They'd say "Jasysus no but I'd love one too. How much would you sell it for Tea ?"
And I'd say "Not for sale chief, they're hard to come by and I may need it some day"

Yep, it'd be a great talking point.
 

I thought the term 'barrel of oil' was a bit of a misnomer - how much of it actually ships in 'barrel' form? Would a consumer pay a premium to purchase and have a barrel shipped to them?
 
csirl said:
I dry lined my walls and put thick insulation in my attic, so I'm using a lot less heating oil than last year.
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I turned off my heating and left the country for the next few weeks, so beats that hands down.
 
rmelly said:
I thought the term 'barrel of oil' was a bit of a misnomer - how much of it actually ships in 'barrel' form? Would a consumer pay a premium to purchase and have a barrel shipped to them?
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Barrel refers to a volume measurement, just like pint or liter.
1 barrel is 42 gallons or roughly 159 liters. I believe the term orginitates in the early days of shipping and transport, where most, if not all, liquids were shipped in barrels.
 
diarmuidc said:
I boarded up my house and move into rmelly's empty house. Beat that.
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I just burned my house down to keep warm and dispense of all the associated bills - hope you weren't inside at the time...
 
Regarding the price of a barrell of Oil and Petrol/Diesel prices. I always thought excise duty was a % of the price but in fact it a set price on Unleaded it is 50.87cents plus VAT (21.5%) plus the gov charge 1c for shipping! So even if the price of a barrell was free it would still cost you 62.8 cents per litre all going to the government.
On Diesel it is 36.81 cents plus vat per litre.
 
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