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jim3au wrote:

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Respectfully, if you are prepared to accept that demand and supply of crude is price inelastic, then it is not necessary to have a production cartel or control over a large proportion of the buyers. Any increase or decrease in demand or supply is going to have a more than proportionate effect on prices.


  

I think that's the key to the most common populist misunderstanding or deliberate mistatement (depending on the populist) about the oil market. 'Supply and demand determine price' means that equilibrium is only reached by somebody demanding less when the price goes up, or more when it goes down. If, as is usually the case in short term with gasoline demand, most people just grouse and invent conspiracies and name scapegoats and call their Congressman to 'do something' when the price goes up, that does nothing to reach equilibrium. OTOH if the price rises weren't causing *some* people to use less, the price would be much higher. But there is no economic law saying *how much* of a supply constraint it takes to skyrocket prices. A lot of people seem to start from the unspoken assumption that a moderate restriction on supply, or even only threat of such*, must only result in a moderate price increase, and anything else is some 'anti-market' manipulation. That's just not how markets work.

*the recent run up in oil prices IMO and that of actual experts on the topic as far as I've read (not political bloviators, but people who actually study the market non-politically) is mainly from the threat of an Iran-related major supply disruption. All the other stuff people mention is in there somewhere at least as minor factors**, but the recent runup is well, recent, and that Iran tension is what has intensified recently. And another basic misundertanding is that 'supply and demand' is only a point value or two curves at a point in time. No, it's a vector of expected functions of supply and demand now and in the future. If you really think Iran will try to close the straits of Hormuz or attack Saudi facilities and perhaps succeed for a time, why would you wait for that to happen before buying and storing oil now? You would do it now. If you're wrong and prices fall back somewhat in coming months you lose some money, try again next time. But if the disruption happens you might make a lot of money. If you think action like that is 'anti market' you're twisting around the meaning of 'market', and probably really don't believe much in markets anyway. The only real alternative is for wise govt bureaucrats to decide what price gasoline should sell for, and have lines at the gas stations when, inevitably, political pressure makes their wise decision that the price should be lower than that which balances demand.

** -at this point refinery capy in the US is a quite minor factor. The US is in recent years a net exporter of refined oil product, so hard to argue there isn't enough total refining capy in the US. US generally imports gasoline (and exports distillate and other oil products) but the tanker has been invented, and world shipping rates right now not so relatively high. Recent refinery closures in US (Hess's in US Virgin Isl, Sunoco's at Marcus Hook PA) are because the operators can't make money at today's relative crude and product prices, far from any govt-thwarted intention to build new refineries.
-As on other threads, a determined US policy to develop more oil domestically, and/or faciliate use of Canadian oil (Keystone pipeline), a generally 'pro oil' approach, would certainly favorably affect world prices at the margin, but to an unpredictable and probably limited degree.
-Inexorably growing developing world demand is the biggest factor in the secular change in oil prices since say 1990's, but nothing special just recently, when in fact Chinese growth seems to be slowing from what was previously expected.

Joe