Chronic suspicion clouds thinking on oil price behavior

Bob Tippee

Unsold oil makes no money for oil producers. This insight somehow eludes adherents to the chronic suspicion that high oil prices can result only from withheld supply.

The suspicion never goes away. It's at work in analyses of current conditions, even though prominent among those conditions are rising production and efforts to increase capacity.

This writer encountered a new twist on these predispositions recently while participating in a radio-show panel discussion.

A Dutch journalist propounded that the Russian government was pushing OAO Yukos toward bankruptcy in order to suspend the company's 1.7 million b/d of production and drive up the price of oil.

To support the theory, a counterpart from Moscow offered data showing how much the Russian economy grows with each dollar-per-barrel increase in the crude price.

Suspicion confirmed. Next subject.

The problem with this analysis, of course, is that in order to bring about the supposed increases in oil price and economic growth, Russia would have to forgo 1.7 million b/d of production.

The arithmetic is discouraging.

If Moscow undertook the production cut with prices at, say, $40/bbl, its maneuver would have to raise the crude price by $9/bbl to compensate for the volume loss�to 7.5 million b/d from recent output of 9.2 million b/d.

In a market already anticipating problems, prices might not rise that much despite the supply loss. Even if they did, the gain would be brief.

In response to the price jump, demand would subside, and supplemental supply would emerge from previously uneconomic sources of production. Suspicious theorists forget that the incentive to produce strengthens as prices increase. This is the bane of cartels.

For now, of course, Moscow has things both ways: The threatened Yukos production remains on stream, and oil prices jump with every sign of disruption.

Yet to suspect that exploitation of market skittishness, rather than politics, explains the Russian government's strangulation of Yukos would require fiendish imagination.

The radio-show panelists didn't stretch that far. Like so many others, they had attached a luscious suspicion to oil prices and saw no need to think further about the subject.

(Author's e-mail: bobt@ogjonline.com)

Related Articles

Speaker suggests how Russian regime change might occur

02/27/2015

Speculative details about regime change in Russia have emerged from an especially interesting source.

Chevron wins again in Ecuador case as moneyman recants

02/23/2015 With another triumph in its long battle against litigious gold-digging involving Ecuador, Chevron Corp. again demonstrates the goodness of corporat...

Oil forecasts need a new asterisk for supply instability

02/13/2015

Do projections of worldwide oil supply need another asterisk?

EPA offers new, twisted excuse to stall Keystone XL

02/05/2015 Anyone puzzled by the delay in approval of the Keystone XL pipeline border crossing—running 6 years now, and counting—should read the Obama adminis...

After Keystone nod, Congress should okay ANWR leasing

01/30/2015 Now that it has passed legislation supporting the Keystone XL pipeline, Congress should approve oil and gas leasing of the Arctic National Wildlife...

Data refute Lew’s claims about taxes paid by producers

01/23/2015

On the subject of taxation, administration officials count on the public to believe anything.

Market watchers’ adjustments offer hints of recovery

01/16/2015 Because markets look ahead, changes in standard forecasts offer potentially important signals during storms such as the one now pummeling the oil a...

Study probes link between US dollar’s value and oil price

01/09/2015

While the US dollar’s value against other currencies influences the price of oil, the relationship is complicated.

Condensate export status a problem with easy solution

01/02/2015 Some perplexing problems have simple solutions. A problem perplexing US producers and regulators is the status of condensate relative to the longst...

White Papers

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

Available Webcasts



Global LNG: Adjusting to New Realties

When Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST



On Demand

US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected