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 06:38:54
Subject: Re: How does high crude oil prices equate to wealth?
From: r...@t...net Search message by this author

On 11 Dec 2006 20:39:16 -0800, "Brablo" <g...@y...com>
wrote:

>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?

The latter. They are just rent collectors.

>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.

No, it is the oil _owners_ -- i.e., the owners of the unproduced
natural resource in the ground -- who are profiting, whether they are
oil companies or OPEC governments.

>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)?

Extraction and processing costs are if anything on a downtrend, and
are irrelevant. It's all about the economic rent of the hnatural
resource.

>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).

It's nothing to do with the extraction, refining, etc. costs. It's
all about rent.

-- Roy L