Producers seek the profit maximizing price, not the highest price (those aren’t the same).
Would you rather sell 1,000,000 barrels at a profit of $10 per barrel ($10M profit) OR 1,200,000 barrels at a profit of $9 per barrel ($10.8M profit)?
- If I lowered prices to $9, my competitors would follow, and I'd likely sell only 1,000,000 barrels
- I have a finite supply of oil. If I sell 1,000,000 now, I'll have an extra 200,000 to sell at some point in the future. I'd like each barrel to cost as much as possible.
In other words, there are time dynamics. OPEC might only control 40%, but if everyone follows OPEC, everyone wins. If someone breaks from OPEC, other parties have an incentive to break as well.
There are many silent cabals, where parties don't conspire in any explicit way, except by signalling through market prices.
Sure, and I'd love to have $1B, but that doesn't mean I'll get it..
Yes there are time dynamics - ramping up production, production delays due to maintenance, prices changes you can't predict. Nobody has a crystal ball.
And OPEC can't even control it's own members, so I'm highly skeptical anyone else follows them.
Humans are great at seeing patterns where there are none. Oil skyrocketed in 2008, everyone said it would never go down, then it crashed below $20. That doesn't seem like the kind of market where suppliers control the price.
Citation needed.
The US Gov literally said the current (in 2008) high price are due to demand/supply mismatch and "most industry experts contend that oil resources are plentiful ... Drilling activity is at a high level" [1]. As in the price will go down.
OPEC only needs to control its members a tiny bit. Oil is sold on the margin and so a tiny demand/supply mismatch means a large price difference [2].
[1]: https://www.dallasfed.org/~/media/documents/research/eclett/... [2]: https://www.vox.com/2015/1/5/7493799/oil-prices-chart
Regardless, I think you just proved my point. Supply/demand determines prices not OPEC.
If OPEC controlled prices they wouldn’t have dropped 80% post-2008. Prices were so low that capacity was taken offline and some countries has serious financial difficulties.
That doesn't sounds like a monopolistic market.
The correct solution for the consumer is to massively reduce the reliance on oil, but that requires long term planning which democracies and corporations are awful at.
Is this true when you only have fixed amount of the commodity? Wouldn’t players try to optimize the total NPV of all resources sold into the future?
New production is capital intensive. It’s currently difficult for oil producers to justify that to investors. The higher prices are only accelerating secular trends towards long-term lower oil demand.
Every barrel they pump is a barrel they can’t pump later on. In fact, the cost of oil extraction generally trends upward over time as “easier” wells are exhausted and more expensive ones are tapped.
Sure, going full steam and selling every barrel available would make for a great 2022, but they may pay the price in the future if they suddenly are out of cheap oil
Granted, our current president shouldn't have been so negative towards fossil fuels.
That said, he did nothing to create this particular upswing.
My local Chevron gas station 94960 has been fluctuating from $5.50 to 6.40 every other day since Ukraine was invaded.
These oils companies, along with so many other companies, raised prices because they thought they could get away with it. "Let's blame a war. Let's blame inflation.". Oil profits have never been higher. It just smells like cronyism.
I've always wondered why gas prices in the Bay Area are the highest in the nation. While we have huge refineries across the Richmond Bridge.
That said, he did nothing to create this particular upswing"
Why did you bring it up if it has nothing to do with the current situation?
Obviously because gas tax in California is the highest in the nation, by quite a margin. CA charges an extra 62.47 cents per gallon, whereas next door Arizona only charges an extra 19 cents per gallon.
Unfortunately, for gas, moving it through a pipeline beats LNG ships hands down in efficiency, so Europe cannot simply switch providers. At least not fully so.
A) price of oil/gas was going up well before Russia/Ukraine. Putin’s work is an aggravating factor, but hardly the whole reality of the market challenges.
B) fuel demand is pretty inelastic compared to lumber. The world is still moving into fossil fuels (increasing demand each year), not flatlining, let alone decreasing. When the supply shrinks, we’re all competing for the same limited supply of dino-juice with our fist-full of dollars. [yes, algae and plankton, I know].
Also, adjusting production and delivery is not an instantaneous process. Especially when you substitute a pipeline-based feedstock (as Europe is doing right now) in favor of tankers. You need tanker capacity, you need to have contracts for this, you need terminals, and you need pipelines from the port to the refining facility.
Things are simply not as easy and supply shocks take time and effort for resolution.
Trump tried to do exactly that in the original 2020 COVID stimulus bill: https://www.cnbc.com/amp/2020/03/26/us-suspends-plans-to-buy...
Original plan was to buy $3B worth of oil at about $24/barrel to fill the strategic petroleum reserves. But the Democrats blocked it in the Senate and demanded it’s removal from the bill.
It's purely free markets doing what they do - trying to optimize for the point where profits are highest by raising prices until demand drops sufficient to level off total profits. Externalities be damned (environmental, social, economic, etc.)
And OPEC cares a lot about externalities. They know that pushing oil prices high enough will cause a recession which leads to less money for them. (They learned this in 1979). So they try to maintain a healthy but not runiously shortsighted profit.
They're price gouging. They learned their lesson from the shale boom and are colluding to keep prices high / aren't re-opening wells for fears of a sharp drop in prices. Remember when crude went negative?
Avoiding investments that you know will result in huge losses isn’t price gouging.
Second, pumping oil out of new sites is myopic, at best.
And third, any administration's policies are hardly going to move the needle on the profits oil companies are going to make. They may tell you it's Biden, but that's just convenient cover so folks stop blaming them for problems they could eminently fix.
I'd argue for "use it or lose it" laws in basically every sector. Farmland, speculative RE investment, etc. Or a sort of delapidation tax
In b4 'but property rights' they're fundamentally a privelidge granted to you by the 'polis'and protected by the polis for it's own benefit.