I've heard many argue that if Obama would lift the "moratorium" on the gulf or if the US would allow for more domestic oil drilling that this would in fact lower gas prices or oil prices in general.
However, I also hear the argument that the Oil market is a world market and if oil prices are high on a world stage they will automatically be high at home, regardless of how much we drill domestically.
Could someone explain more clearly the workings of the oil market, futures market, and if domestic oil drilling would have an impact on oil prices in somewhat detail/simple terms to understand?
Yes, it's a world market. And yes, if world prices are high prices in the US will be high too. Since if American producers could get more for their oil in other places they would not sell it in the US for less. More American supply would significantly lower the world price though.
I think allowing drilling at home is mostly about securing the supply and not being dependent on the middle east than about lowering the price.
MarcosPortillo: I've heard many argue that if Obama would lift the "moratorium" on the gulf or if the US would allow for more domestic oil drilling that this would in fact lower gas prices or oil prices in general. However, I also hear the argument that the Oil market is a world market and if oil prices are high on a world stage they will automatically be high at home, regardless of how much we drill domestically. Could someone explain more clearly the workings of the oil market, futures market, and if domestic oil drilling would have an impact on oil prices in somewhat detail/simple terms to understand?
The price of oil, like the price of anything, depends on three things: Supply, Demand, and Value of the Currency.
If Supply goes up, and the other two stay unchanged, the price will go down. No getting around this. The reason Obama doesn't want domestic oil drilling is out of concern for the environment. Some will argue that his concerns are misplaced. Whether the environment is more important to Obama than his re-election remains to be seen.
At any rate, even if we assume that the other two factors are making the price go up, increasing the supply significantly will tend to lower it, or at least stop it from going up as much as it would otherwise. So that an argument like, "It's going up because of foreign demand, therefore even if we increase the supply it won't matter" is economic ignorance that boggles the mind. It's like saying there is no point in giving a sick man medicine because he is sick.
If Demand goes up, that raises prices. Demand in economics means the desire for something combined with the abililty to pay for it. Everyone in the world has always wanted oil, but not everyone was able to pay for it. If the supply stays the same, and the currency stays the same, then if oil goes up in price, some other part of the economy will have to go down in price. After all, the money just doesn't exist to buy both.
The value of the Currency. If the money used in the country loses purchasing power, prices of everything go up. A currency loses its purchasing power when more of it is in existence then there was before. Quantitative easing is, by Bernanke's admission about 2 years ago, the same as printing money.
When the reason for higher oil prices is quantitative easing, then not only will the price of oil go up, the price of everything will go up. This is indeed the case in our current situation.
Bottom line, the world may be richer and therefore demand for oil may have increased because of that. We have no control over that. We do, however, have control over other the other two factors. We can increase the supply and we can stop all forms of quantitative easing. Come to think of it, we can also decrease govt demand for oil by ending the three wars we are in, freeing up supply for the citizenry.
One last way to decrease the price of oil is by reducing taxes on it. If Exxon decided today to give away oil for free, meaning not taking any profits but just covering expenses, that would lower gas prices by TWO CENTS. If the govt lifted all taxes on gas, that would lower the price by 78 cents.
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It's easy to refute an argument if you first misrepresent it. William Keizer
But what I have found is that some countries pay a lot less for the petrol at the pump than other countries. The price at the pump is not directly effected by the actual market price of oil. But when the market price of oil goes up the petrol stations do put up their price.
http://www.kshitij.com/research/petrol.shtml
Jack Roberts,
The discrepancies you mentioned are not a result of currency values? If not, I would imagine that variation in demand across nations could account for that.
Yes, currency variations and varied demand would seem like a logical explanation. Although currency and demand variations has a large effect, there are other factors that effect the price at the pump. USA has a large demand and the price is relatively low compared to countries with less demand like the UK. South Africa has a relatively weak currency and the demand is average and has a relatively low price. There appears to be other factors that effect the price of petrol at the pump in any specific region. But when the market price of oil goes up, the cost of purchasing petrol for the petrol stations will not go up in parallel with the market price. It might come later in time or never at all.
UK vs South Africa
SA $39.58 `/ ltr = R259.60 UK $85.02 `/ ltr = £50 £50 = R548 Direct currency conversation shows that petrol is roughly twice as expensive in the UK than South Africa. Minimum wage: UK £5.93 an hour = R64 SA R10 an hour UK 8.4 hours to buy one litre at minimum wage SA 25 hours to buy one litre at minimum wage
Two Points:
1. The demand for oil is very inelastic, meaning that any increase in the supply of oil would have a disproportionate downward impact on prices.
2. The United States has much more oil than commonly assumed. Enviroleftists often claim that the United States only controls 2% of the world's oil production, so any increase in oil drilling in the US will only have a very marginal impact (which isn't true, see point #1). However, this 2% is only "proven reserves," in other words, that 2% only refers to oil that is already being drilled in America. We have 800 billion barrels of oil locked up in shale in Wyoming, Utah, and Colorado. That's three times the oil reserves of Saudi Arabia. We have 10 billion barrels of oil locked up in ANWR. We have 86 billion barrels of oil locked up in the outer continental shelf. If the United States government opened up all of these areas to oil production, we could have a very significant impact on the price of oil. See this.
Political Atheists Blog
BTW, with regards to peak oil: