Re: How does high crude oil prices equate to wealth?

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Number of messages in the thread: 1

1. Date: 2006-12-13 00:51:07
Subject: Re: How does high crude oil prices equate to wealth?
From: "Zerge" <z...@h...com> Search message by this author

Brablo wrote:
> I've got quite a few questions regarding the higher oil prices that
> we've seen in the last few years. Is the price of crude oil higher
> because the costs associated with the extraction and processing the oil
> higher? Or is the prices higher because the oil-rich nation realized
> that they could simply price it higher because the demand is very high?
>
>
> If the reason why the oil prices is high because of the first reason
> (i.e. the costs associated with the extraction, processing, and
> transportation, etc. is higher), then why are the oil-rich nations and
> oil companies profiting? I would think that these companies would
> maintain their profit margins (and not the absolute profit levels).
> But it seems that the oil processors (oil companies and the oil-rich
> nations) are benefitting from the higher oil prices.
>
> Suppose that it costs $10 to extract the oil from the ground, and the
> price of the crude oil is, let's say, $12. This is 20% higher than the
> costs. Now suppose that the costs to extract and process the oil is
> $20. Higher oil prices is harder for the consumers, who will
> invariably use less. Would the oil producers sell at $24 or (to
> maintain the 20% margins) or at $22 (to maintain the $2 profit)?
>
> How is higher prices of oil beneficial to the oil-rich nations? I
> would think the cost-increase is due to the difficulties of extraction
> (supply side pricing mechanism), and not the profit-motive of
> increasing the prices, knowing that consumers would still pay the
> higher prices for this essential commodity (demand side pricing
> mechanism).

I won't give you any answers; instead, let's use the Socratic method.
Think about ALL those commodity traders that buy and sell oil futures.
Think about what makes them tick, how they make their decisions. And
you will be closer to understanding the oil market.