Razorbak: "The laws of supply & demand have not been repealed."
Razorbak,
The following was posted on Mar 9, 1999, by yours truly, in response to a Supply & Demand Question on the YAHOO UFAB message board:
messages.yahoo.com@m2.yahoo.com
"ASSUME: "You have ten oil wells producing 20 barrels of oil per day with proven reserves of 3m Barrels (41 years @ current levels of production). Assume also, that the revenue is almost your sole source of income now and for years to come and forces beyond your control drive the average price from $20bpd to $12bpd because the consumers only need 180bpd of your 200bpd production.
QUESTION: "What do you do?"
SUGGESTION: "You might shut down 3 of the wells leaving you with daily production of 170bpd (10bpd less than the consumer presently needs)." The effect of this alternative action would be to increase the price back to $20 or more and extend the life of your reserves from 41 years to 48 years+ and increase your current daily income from $2400 per day (200bpd * $12.) to $3400 per day (170bpd * $20).
The struggle between exporting nations to maximize profits and extend the life of their income stream and the consuming nations who want the lowest price possible consistent with their own national interests is what makes the market. Within the group of exporting nations there is continuous struggle for increasing market share and selling @ a discount is one way of achieving this. One way to discourage discounting is a 'quota' system. The problem with such a system is that people and countries CHEAT which stimulates non compliance with the quotas by other nations and a breakdown of world crude prices ensues. That is where we are now.
The Exporters are being forced by their own national interest to comply with previous production quota limits and make further reductions to get world prices back to historic norms. The degree to which they are successful will have profound impact on the economies of the exporting nations and the consuming nations. I think cuts will be made, because to do otherwise is suicidal and make no economic nor political sense.
Regards
SargeK"
I don't think it is a simple question of Supply and Demand; but, a modification of production levels commensurate with a 'fair' market price for producers and users. An analogy, if General Motors has the capacity to produce 100 vehicles per hour, but is currently selling only 95 and the production of each vehicle over 95 is driving the price down and reducing profit margins, what do they do? The answer is obvious and in my opinion no different than that from producers of energy.
There will no doubt be some cheating as evidenced by recent history. The 2.31mbpd reductions, I believe reflects a "20% cheat factor" and/or a level from which to bargain at the 'meeting'. If true a 'real' reduction of approximately 1.85mbpd will result, more than enough, in my opinion, to attain the desired goals. With the additions to the SPR, increased domestic and world wide consumption coupled with draconian cuts in domestic production, the future outcome is clear. The trend of Energy prices (and in my opinion other commodities in the CRB) will trend up rather significantly over the foreseeable future. The CRB has bottomed right along with crude and the cycle of lowering commodity prices has been reversed.
News of creeping inflation and higher interests rates will be making headlines before the end of this year. Count on it. Incidentally, for those wishing to refinance their home mortgages or buy a new home, now is the time to do it.
Have a good day,
SargeK
P.S. People and nations act to protect their own 'BEST' interests. It is a natural thing and I don't argue with Mother Nature. <lg>
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