Pepys - new poster? welcome

The drop in oil, much like troop reductions in Iraq, will not be a big surprise to people paying attention but will allow the Dems to try and take credit for something they had little to do with.

I confess I don't have a clue how commodities markets work (that's what oil is, right?). It seems like it should work much differently than stock markets, since you've always got more "product" coming onto the market, unlike stocks, right? Plus, it seems that it's a chain from producer down to consumer, so unlike with stocks, you're not going to buy and then hold on to your shares until the price goes up, or is there more to it? Anyone understand it, or know a good FAQ?

Lynne Kiesling at http://www.knowledgeproblem.com is always good on energy-market issues. Here is a post of hers from a couple of months ago, which noted that crude futures prices were above the spot price, a condition known as contango:

Oil: shall we contango?

Read the whole post, but the key point is this:

One reason this is interesting is that this contango condition is inducing refiners to buy more crude oil than they can currently process and sit on it, because the carrying cost of the inventory is lower than the expected spot price in the future.

And that is what you are seeing now, high inventories combined with current prices not falling because the folks who own the inventory are still betting on a high-enough price in the future to justify their carrying costs.

Areas in the U.S. and overseas that were marginal suppliers of oil at $20-$30 a barrel become more favorable targets for exploration when the price hits $40, and folks come running from everywhere when it's at the $60-$70 level, because any big hit can more than offset a potential dry hole or two. But it does take time to get all those areas into production to the point they can actually affect world markets.

Once the domestic and foregin active rig counts reach the point that there are more wells pumping than there are markets for what's coming out, the price will start dropping to its natural level.

The thing is, there are already incredible downward presures on the price of oil. Even if the new sources never come on line, the price is still too high by at least 20$. As Joe said, this has to be the result of speculation, no?

Don't forget to factor in the "EPA premium" on the price of domestic crude that isn't paid when you buy from Venezuela or Saudi Arabia. That's one thing the "energy independence" fetishists never bother to consider: they could encourge more domestic production by simply reducing the regulations. (And I think they never bother because their position on energy policy has nothing to do eith economics and everything to do with emotion.)

Raoul is right. One of the causes of the sustained high prices is the expiration of the post-Katrina exemption on enforcing EPA gas formulations. The oil industry calls it "boutique fuels".

Local gas under three bucks today. Wonder if the media will notice.