Can someone explain how oil prices are determined?

Obviously, it has nothing to do with current supply/demand. I don't get this whole idea of speculation. What are they basing their speculations on? It seems to me that oil companies wouldn't be making record profits if oil was as scarce as they make it out to be. If it were so scarce, all the profit would go back into acquisition, extraction, production and shipping. And also, why doesn't the fact that these high oil prices are disrupting the global economy resonate on the market? It seems that every other sector is declining because goods are more expensive to produce and ship and people can't buy as much as they used to.

http://www.opec.org/opecna/Press%20Releases/2008/pr0720...

No 7/2008
Vienna, Austria - 8 May 2008

In recent months, oil prices have become increasingly volatile, mainly driven by financial market developments and the increased flow of speculative funds into oil futures. The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher.

There is clearly no shortage of oil in the market. OECD commercial oil stocks remain above the five-year average, with days of forward cover at a comfortable level of more than 53 days. US crude inventories, meanwhile, rose by almost six million barrels last week, which is a further indication that oil supplies are plentiful. OPEC Member Countries continue to produce at more than 32 million barrels a day (mb/d). In addition, a number of new OPEC crude oil projects have started to come on-stream and OPEC spare capacity continues to increase, with the figure currently standing above 3 mb/d. At the same time, crude oil movements indicate that some Member Countries are unable to find buyers for their additional supply.

OPEC will continue to be proactive and monitor these developments closely. The Organization stands ready to act if the market shows a need for any further measures.

The Organization will continue to strive for a stable and balanced market, with prices that reflect fundamentals, and are favourable to both producers and consumers.

-------------------------------------------------------------------------------------------------------

So OPEC says that there's no supply problem. Are they lying? Quite possibly.

Gas prices are up globally and many nations pay more than we do. I just don't think that we're a platinum card holder anymore and they know that we can pay more. Gas prices are low in China and the Far East, however, probably due to their individual ability to pay and buy in bulk.

Here are some links to serve as a primer for you


http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm

http://useconomy.about.com/od/economicindicators/p/Crude_Oil.htm

http://www.howstuffworks.com/gas-price.htm

http://en.allexperts.com/q/Oil-Gas-3147/price-oil-determined.htm

http://www.helium.com/items/779820-economic-philosophy-market-prices

When I was but a lad, the price of oil was determined by contracts i.e. exxon, or mobile or whoever would buy oil at say $10 a barrel for a predetermined amount of time, whether that was 1 year, 5 years or 10 years. They were able to "set" the price of a gallon of gas) which, when I was little, varied between .25 and .32 per gallon. That sounds cheap, but that was at a time when people were making under $2 per hour so the impact to the household budget was equal (roughly) to today. Oil was then moved to the commodities market where anyone worldwide could bid on how much they're willing to pay. The more people bid, the higher the price went. Today, India, China the U.S. and every other country in the world is bidding. Add to this speculators (those who buy betting the price would go up) are in the market. It's estimated that up to $70 per barrel today is simply speculation money unrelated to the true cost of a barrel of oil (estimated at $45-$50).

People saying oil could go to $200 a barrel are off base IMHO, because just like the housing bubble, this is an oil bubble that will burst once the speculators start to bail.

Same old song and dance.

Oh, no, it couldn't possibly be supply/demand constraints. Anything BUT that.

IEA says demand is increasing 2% year-over-year and supply is decreasing 2% year-over-year. That's a 4% gap so far. But there's no issue with fundamentals.

Whatever.

I shun thee!

and moved to the back of the pack of lemmings.

if it's traded on future speculation, doesn't that mean that it's not based on current supply and demand?

for bids on the commodities market. They ask a certain price, and somebody bids lower usually, trying to get the crude cheaper. But if there is more bidding then it will go up in the settlement price. Somewhat like an auction, except OPEC manages to keep a tighter rein on the amount to be bid on, thus causing higher prices. And now you have other groups buying in large quantities to keep it off the market, and then reselling for higher prices. These are the speculators. Clinton broke the plan of the speculators in the 1990s by threatening to flood the market by re-selling oil from our strategic reserve. Bush won't do that because it's his buddies who are making the killing.

They set the price according to what major vacations they want to all take together in only the finest hotels in the finest locations in the world. Those prices are pure greed. They decide those prices on their whim...because they can.

how I am suppose to do that when I need to drive to work everyday?

I posted this a few days ago:

Excellent peak oil video on the Documentary Channel now.
And now I think I at least partially understand the high price of oil.

All the cheap, easy to get oil is gone.
There's still oil to be gotten, but it's much, MUCH harder to get at, and thus exponentially more expensive.

In offshore drilling, 1000' used to be considered 'deep'.
Now rigs are capable of 9000'. But that comes at a huge increase in price of the rig and more roughnecks and technicians to operate it.
And to get that oil to refiners and markets is much more costly because...it takes ever more expensive oil (gasoline, diesel, etc.) to get it there. A vicious circle.

There's a lot of recoverable oil locked up in oil shale and oil sands.
But again, the extraction methods are much more expensive in time, equipment, labor, transportation and processing.

So there's no more hauling a relatively cheap rig out to somewhere in West Texas, poking a hole in the ground, and bringing in a gusher.

Yes, the oil companies are making a huge profit. And I think we're being ripped off, at least to a degree.
But that's not the whole problem by a long shot.

OK, I'm ready for your critiques.
:-)

contributors to the high price of oil in the US is the weak dollar. Even if the price of oil doesn't go up to Europe, as the dollar falls in value it will cost more US dollars.
Also, the shortage of refining capacity in the US causes artificial shortages of gasoline. Back in the late '80s major oil companies bought out independent refineries and simply locked them up. (so much for the BS about environmentalists not allowing refineries to be built.)

until we get reliable leadership in the White House and Congress.

If they're all in the pockets of the oil companies then we're all going to have to adapt and overcome.

It's a complex process and the dollar definitely plays into it. Also, my understanding of the refineries is that it will take so long to build and bring on line (years not months), that it will really have no impact on the price of oil.

can get away with.

If the oil monopoly was broken by the increased supplies of alternate energies, their entire racket would crash and burn and the world could begin to move forward with quality of life issues.

here will be used elswhere where demand is growing, for instance India and China.

cost/price follow usage if any true form of economics/accounting is in play?

The rest is pure speculation - the first tier purchasers are holding oil off the market to drive the price up.