Oil Prices and Supply

James Hamilton has a contrarian view on the reason why oil prices are so high. There are two factors contributing to the problem.

The first is that about 340,000 barrels/day are still shut in as a result of Hurricanes Katrina and Rita. Further, it there is no plan to bring that production back on-line.

“By and large those production platforms that are out are not going to be put back because it’s not economically desirable to reinvest to put those facilities back in place,” Bodman told the House Energy and Commerce Committee during a hearing on the Energy Department’s proposed 2007 budget.

Bodman said the shut-in production platforms are mostly in old oil and gas fields close to shore.

“They tend to be depleted and it would not economically be viable to reinvest in to rebuild them and the companies haven’t done that,” he said.

On top of this there are about 470,000 barrels/day that are shut in due to unrest in Nigeria.

In short, current world production is below the peak attained last year and demand shows little signs of easing up. Despite the various conspiracy theories out there about how oil companies are manipulating the price, one significant component seems to be the decrease in supply.

Update: I decided the picture of world oil supply at Econbrowser (and from the Oil Drum) would show this problem quite nicely.

iea_mar_06.jpg

Some related posts below the fold.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. RA says:

    Drilling in the US and building more refineries IS the answer. It goes to show you how many stupid Americans reject this solution. We must have a higher percentage of idiots living in our country than we have ever had before.

  2. Steve Verdon says:

    Only temprorarily RA. Sure it might help the current situation, but as demand continues to grow that answer wouldn’t be enough.

  3. Jim Henley says:

    Sorry, Steve, but unrest in which country? Unless I’m misreading there’s some VPR going on.

  4. Steve Verdon says:

    Jim,

    Nigeria. Sorry, that is what happens sometimes when I click back and forth between sites reading things and double checking information. Seems perfectly clear to me as I know what I’m writing, but to others it can be very opaque.

  5. Herb says:

    Steve:

    You can put all the charts up, cite figures, quote oil publications, give us economic theory and what ever you want, But,

    Over 80% of the people in the USA think the big oil companies are ripping them off and the profit posting today of 8.4 Billion by Exxon Mobile seem to bear that out.

    I say to you again, The Republicans have the power to remedy the situation and if they don’t do something quickly, They are through as a viable political party this coming election.

    Steve, somehow, you have got to realize that the People Have had Enough.

  6. Steve Verdon says:

    Herb,

    If 80% of the population thinks that pink bunnies are the cause for higher oil prices is that really the cause? I hope you see the problem with the argument via popularity.

    I say to you again, The Republicans have the power to remedy the situation and if they donâ??t do something quickly, They are through as a viable political party this coming election.

    I fail to see how this is my problem. I’m not a Republican. I don’t particularly like what the Republicans have done in terms of many policies sane 2001. Frankly, I’m hoping for a Democratic President and a Republican Congress. More gridlock not less, I say.

    Steve, somehow, you have got to realize that the People Have had Enough.

    So what is the solution? Tax the living shit out of oil companies? They’ll just move to other countries, shut down, or some other thing. Oil prices are still set by a global market and there isn’t much you can do about that short of nuking china till it is a large sheet of glass.

    Really Herb, you keep saying that there is a problem, that people are pissed (although I’m not seeing it in things like expenditure data, confidence surveys, etc.). So what is to be done?

  7. Herb says:

    Steve:

    For some unknown reason, you seem to be taking comments the wrong way.

    I never said you were a Republican, nor did I imply that you were, What I said was just a statement to express the future of the Republican Party.

    And, somehow, you still don’t get what I was saying about how 80% of the people feel. It makes no difference if 80% of the peoples are “Right, Wrong, of Indifferent” They think what they think and that’s all there is to it.
    That “pink bunnies” thing you mentioned was a little over the top for you.

    There are solutions:

    1. Put the skids to the “Oil Speculators” Bush could do this with a decree.

    2. Take the 15 Billion in tax credits back from the oil companies. Their profits show that they “don’t need tax credits”

    3. eliminate the Federal taxes on gasoline.

    4 Force the States to eliminate or drastically reduce their taxes on gasoline.

    5 Put enormous amounts of pressure on the Saudis and eliminate all aid ti Saudi Arabia if they don’t comply with lower prices.

    That’s enough for now Steve, so sit down, cool off and pick the hell out of the above “Things that could be done”

    And Steve, a personal note, you appear to really be getting worked up over this issue, just back and relax a little. I still like you.

  8. Steve Verdon says:

    And, somehow, you still donâ??t get what I was saying about how 80% of the people feel. It makes no difference if 80% of the peoples are â??Right, Wrong, of Indifferentâ?? They think what they think and thatâ??s all there is to it. That â??pink bunniesâ?? thing you mentioned was a little over the top for you.

    And you aren’t getting my response. At all. What the people think, if it is indeed that oil companies are to blame, is probably wrong. Taking action on that will almost surely make the situation worse, not better.

    1. Put the skids to the â??Oil Speculatorsâ?? Bush could do this with a decree.

    So just to have this straight, you think that economic activities should be determined by the whim of the President? And what exactly is “oil speculating”? Are you talking about the futures market? If so, I suggest you read Prof. James Hamilton’s post on that, it is quite illuminating.

    2. Take the 15 Billion in tax credits back from the oil companies. Their profits show that they â??donâ??t need tax creditsâ??

    Okay, fair enough. I think corporate welfare is bad in general, and for firms that are earning profits bordering on outright theft.

    3. eliminate the Federal taxes on gasoline.

    And replace it with what? Taxes now or latter, and what type of taxes? And how does reducing the tax on gasoline help when you raise the income tax?

    Further, this will likely only exacerbate the problem. Since the price will initially fall it will increase consumption which will put pressure on prices again.

    4 Force the States to eliminate or drastically reduce their taxes on gasoline.

    Same comments here as for the federal gas tax.

    And Steve, a personal note, you appear to really be getting worked up over this issue, just back and relax a little. I still like you.

    No not worked up, just a bit frustrated when you have some of the top experts in the field (e.g. James Hamilton, Lynne Kiesling, etc.) saying it ain’t those greedy oil companies. On top of that there is other data that says it isn’t things like collusion (i.e. collusion usually means a decrease in output, but the decreases in output are shut-ins due to things like unrest in Nigeri and hurricanes). Even after all this the mantra is still: Those damn oil companies they are screwing us.