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The Oil Economy: Supply and demand

Posted January 11, 2008

"Many still use speculation and geopolitics, rather than supply and demand, to explain rising prices. These pundits never question whether the exchange of paper money for black gold is sustainable." — Dan Amoss.

Blogger's note: With oil coming in at (or near) $100 a barrel these days, I thought you'd appreciate a recent article by Whiskey and Gunpowder's Dan  Amoss. Dan took a moment to explain the real reason oil is growing increasingly expensive, and it has nothing to do with America's Iranian economic policy. Instead, the economics of oil are based on supply and demand. And that supply could be running out. You can find the complete article here or read on for more.

by Dan Amoss, Whiskey and Gunpowder

Baltimore – (TFN):  People are amazed by numbers. Benchmarks and records can have huge psychological effects on the way people view a problem. So why are people so slow to react to this new milestone?

Oil has finally reached $100 per barrel, yet few people on the distant end of oil supply lines are aware of how fast the status quo can change. The status quo tells us to expect more oil when we want it. That market forces always bring ample oil supplies to market. That oil producers will always accept a fixed amount of paper money in exchange for concentrated liquid energy.

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But the status quo view of the oil market has been wrong for years. Many still use speculation and geopolitics, rather than supply and demand, to explain rising prices. These pundits never question whether the exchange of paper money for black gold is sustainable. In the old days, when oil prices rose, big exporters like the Saudis recycled most of their oil money into the U.S. bond market, giving rise to the term “petrodollars.”

But those days are long gone. Middle East oil producers now pump lots of money into local economies and oil price subsidies. These policies have led to much higher oil consumption in OPEC countries and will keep lots of oil from ever reaching the export market.

The oil trade has radically changed, and investors need to understand these changes. So it helps to look at a model of a hypothetical oil exporting country. Read on to learn how long America can last before running out of oil.

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