Oil Crisis Explained in 3 Minutes

Oil Crisis Explained in 3 Minutes(blog.nvestly.com)

50 points by kyu 11 years ago | 32 comments

stickperson 11 years ago |

Knowing absolutely nothing about oil and the industry, I don't view paying $3 a gallon now vs $4.29 a couple months ago as a "crisis."

mikeyouse 11 years ago | |

Basically, many economies suffer from the "Dutch Disease" where the easy profits in oil and gas crowd out all investment into other parts of the economy. The massive export economy props up the currency as well to the detriment of other exporting businesses.

When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain..

http://www.economist.com/blogs/economist-explains/2014/11/ec...

minimax 11 years ago | |

If you look at it from the perspective of a city like Houston, where a big chunk of the local economy is driven by the oil industry, you can see why it's a big problem for some people.

http://www.houstonchronicle.com/business/energy/article/As-o...

fargolime 11 years ago | |

Enjoying deflation is un-American! I don't get it either.

giarc 11 years ago | |

I live in an oil rich province and many of my friends are worried about their jobs.

Sven7 11 years ago |

Time for some shale driller bailout planning. If it breaks OPEC it's good for everyone. The unholy amount of funding that supports global terrorism will take a big hit.

fffrad 11 years ago |

Something I do not understand:

- barrel price went from $100 to $60. That's $40 drop.

- Price went from $3.60 to $2.80 a gallon in my city. That's $0.80 only

I don't get it.

refurb 11 years ago | |

$100 to $60 is a 40% drop in the price of oil.

The price of gas is only partially due to the cost of oil. Taxes make up a pretty chunk of the cost of gas. On average $0.50/gal.[1]. Don't forget the cost of refining and transportation. This chart says 62% of the cost of gallon is due to crude oil costs[2]

So based on your $3.60/gal, $2.23/gal is oil. Reduce that by 40%, you get $1.33 and add back in the other stuff and I get $2.70/gal now.

Not far off huh?

[1]http://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States [2] http://www.eia.gov/petroleum/gasdiesel/

desdiv 11 years ago | | |

Does anyone know why fuel taxes are calculated by volume instead of value? That's the opposite of pretty much every other tax on goods in the country.

dawkins 11 years ago | | |

but when oil price goes up, even very little, gas price follows inmediately and proportionally. At least that is the impression I get here in Spain.

socalnate1 11 years ago | |

Not all of the price of gasoline is derived from the price of crude oil. Some of the price is from taxes, transportation and refinery costs which have not changed. (The exact ratios vary depending on where you live).

timeal 11 years ago | |

In San Francisco, average gas prices went from $4.33 to $2.92 (http://www.sanfrangasprices.com/retail_price_chart.aspx). That's a 33% decrease - matching quite closely the crude oil decrease of 40%.

But as someone said, crude oil prices reflect future retail prices. When you go to a gas station you get fuel that is weeks/months old, so it makes sense to pay the price that crude oil was selling at weeks/months ago.

joezydeco 11 years ago | | |

What are diesel prices like?

Here in Chicago, they never dropped. There's almost a $1.00 difference in gasoline vs diesel now.

ibmthrowaway218 11 years ago | |

http://www.investopedia.com/articles/economics/08/gas-prices...

The cost of the raw crude oil is only part (but a significant part) of the pump price.

It's more 'fun' in the UK where fuel duty and other taxes (VAT) form the majority of the pump price:-

http://www.petrolprices.com/the-price-of-fuel.html

kyu 11 years ago | |

Great point. 40% drop in oil prices vs. a 22% drop in gas prices. Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way.

There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there.

I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.

jdrols 11 years ago | | |

> Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way.

This is a gross simplification. I'm not an expert or someone with a deep understanding of how gas stations work, but even I understand that a barrel of crude requires a complex process to turn it into gasoline and even more logistics to get it to the pump. Every one of the people in that process needs to be paid, including your friendly neighborhood gas station cashier.

This line of thinking is the equivalent to wondering why the price of a new car hasn't decreased if steel prices hypothetically dropped. Most products cost much more than their raw materials because to change them from raw materials to products and to put that product on a shelf requires the hard work of many people.

jaddison 11 years ago |

I'm admittedly naïve in this, but wouldn't it make financial sense to buy OPEC based oil stock in the coming few months? Based on whether this is true, of course - so... In theory naturally.

desdiv 11 years ago | |

All the OPEC oil companies are state-owned. That's how the OPEC countries are able to control their production numbers.

_nullandnull_ 11 years ago |

Shucks, fracking is no longer profitable. I was really looking forward to more earth quakes and flammable tap water.

tracker1 11 years ago |

Why not just implement tariffs on foreign oil?

crpatino 11 years ago | |

You'd need to have enough local oil to pick up the slack. For what I know, US has been a net importer for decades...

Or maybe there are enough reserves, but they are in the long game and want to buy the foreign oil first... while the taking is good.

tracker1 11 years ago | | |

Tariffs don't need to make foreign oil go away, only be strong enough to level domestic competition a bit. A $40/barrel tariff would still leave very low oil prices for imports, but at least allow for domestic competition... it isn't about totally squeezing a market out, only leveling some unfair trade practices that would hurt consumers/citizens in the long run.

innguest 11 years ago |

Why does the author keep saying "If OPEC doesn't interfere"? Is the author in favor of price-fixing? I thought all sane human beings understand that a monopoly controlling the price of something is bad.

That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.

civilian 11 years ago | |

I also read an article talking about how the Saudi's wanted to ruin Iran. And another one about how they want to ruin Russia. I feel like any simple explanation like that is probably wrong.

They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production.

http://www.economist.com/news/finance-and-economics/21635510...

However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.