Seeking an "Economics for Dummies" - What up with oil prices anyway?

Easy there.


Simplisticly

The main reason oil (Brent crude) prices are such a big influencer of global economics is due to three simple factors.

1) Almost every manufacture one can purchase requires oil somewhere in the supply chain required to manufacture it. This means oil is an input in a vast number of supply chains, and a considerable portion of the marginal cost of production of many items, hence a shift downward in its price level will lead to falling prices for the output products of those said processes.

2) Almost every single mode of transportation (even electric vehicles & trains) relies either directly or indirectly on the burning of a petroleum/kerosene fuel. This means that the transportation systems of the world rely on the oil price, simply the lower it is the cheaper it is (generally) to get around for most people.

3) Around 1/5 to 1/4 of the worlds total energy supply comes directly from the burning of oil, hence a shift in the oil price will have an effect on the price level of a unit of energy. If the price decreases one unit of energy (should) cost less, if the price rises one unit of energy should cost more.


Now lets look at the implications of these 3 factors.

The main inference we can make based on these fundamentals of oil supply/demand factors.

Considering most manufactured and grown (agriculture requires large amounts of gasoline to power equipment) products require oil as an input, the effect of a decrease in oil usually is lower inflation. Inflation is the measure of the percentage rise in a product/commodities value year on year from point X in time.

I.e if wheat on 15/12/2013 was worth £3 per kilo and today it is worth £3.15 then:

Inflation rate = 3.15/3.00 = 1.05 1.05 x 100 = 105% hence inflation = 5%, the percentage growth/decline in the value.

Now consider the situation of economies with high debt and falling price levels.

Prices fall, then companies profits decrease, this means they can either lay of staff or lower wages to stay profitable.

Either of these options removes demand from the economic system as there is less "cash" to be used to purchase goods.

Essentially deflation as a result of falling oil prices is not a good thing, especially when debt is high as the size of the debt relative to the value of products and money itself actually increases, this is the opposite of inflation which makes the size of the debt relative to prices and wages less.

Now the effect it has on transport.

Makes it cheaper to get from one place to another, makes networking more efficient.

The effect on energy = cheaper, hence products are cheaper to produce. But the deflationary situation in the consumer market means prices fall so margins actually diminish.

So low oil prices mean cheaper fuel for ones car, cheaper prices for food, cheaper prices for goods. But they also mean stagnating/negative wage growth, loss of consumer & business demand, loss of corporate profitability, unemployment, higher personal/government debt and generally economic decline/stagnation.


So essentially, OIL EFFECTS EVERYTHING!

a reply to: LittleByLittle

There's always a pipeline isn't there?

There's always a country that need's overthrowing isn't there?

Turkey is a strange, but essential ally within NATO and I guess they get to call in favours from time to time. They offer a lot, so they can expect quite a bit in return.

a reply to: peck420
www.cbc.ca...

There's a video on there called "the hidden price of cheap oil". It's only about 3 or 4 minutes long. It's what the covered last night.
It also brings up the cozy relationship between the US and the Saudis, suggesting US and Saudi together targeting Russia, Iran, Venezuela. Knocking down competition.

a reply to: snowspirit
Yea, I have seen it.

USA is also one of the primary targets.

a reply to: rusblued9217

That makes sense in an economy that is attempting to reduce its deficit. Unfortunately we live in an economy where, instead of paying off credit during the good times, we simply spend on services and borrow more. Whilst during the tough times we tend to reduce lots of services and benefits, yet continue to borrow even more. They know we can never reduce the deficit so I don't know why any of us buy into this Bullshine. It's all an illusion economics, and economists are merely illusionists.

There was a piece a while back ,I think in June about the Rothschild's divesting their portfolio from fossil fuels .If the price drops to 40$'s it could mean that shale gas and other energy sectors will not be able to pay their debt and the stocks will collapse . When that happens they buy up all stocks penny's on the dollar and then move the price of oil back up . Not saying that is the case but that might also be part of the bigger picture . a reply to: incoserv

These two vids show some of the history of the Rothschild's and some of how they are the ones controlling $$ and what ever you want to connect to $$ . a reply to: CrikeyMagnet

Seeking an "Economics for Dummies" - What up with oil prices anyway?


Saudi Arabia is trying to kill fracking.

That's all there is too it.

Oil will be going back up to where it will be even more expensive.

I don't get it.

People snipping oil/gas is too high.

Now they are snipping its too low.

LOL geez.

Embrace the reprieve.

I blame Obama for the low gas prices, because that's who we were all blaming when the price was high.

Thanks, Obama.

a reply to: CrikeyMagnet

My understanding is that the falling price of oil this time around mainly has to do with the strong USD (and the expectation of continued strong/stronger USD.) Think of it more like, "My greenbacks have become so valuable relative to recent history, that I can now buy a barrel of oil for 60 crisp one dollar bills!"

The other side to that is supply & demand. The Saudis could cause a supply crunch, but dollars are worth more than they were a year ago. If you sold 15 $120 barrels a couple years ago, you could buy a one ounce nug o' gold for $1800. Gold's value is holding up better than oil, buy it is down about 35% in the time oil has come down 50%. Anyhow, it means the Saudis (and others) aren't locked into the same "to be profitable" price as they were in 2009(?) when prices crashed due to a lack of demand caused by the collapsing world economies. In another time they may have throttled back supply, there just isn't incentive for them to lose the volume yet.

I do expect that some of this has to do with Russia & China, but that's for more of a "why" thread then a "how."

Hope my description helps some. I'm no expert, but, knowing economists, maybe that helps me keep it in English SCTM* (Silent Chuckle To Myself)

* Truth in Acronyms Foundation

This has to do with politics. The supply and demand is still the same. So it makes no sense to lower prices. Unless you want destroy your adversary. It's not like a stock pile of oil is going to age and go bad.

originally posted by: snowspirit
a reply to: peck420
www.cbc.ca...

There's a video on there called "the hidden price of cheap oil". It's only about 3 or 4 minutes long. It's what the covered last night.
It also brings up the cozy relationship between the US and the Saudis, suggesting US and Saudi together targeting Russia, Iran, Venezuela. Knocking down competition.

I cant recall where but I read that American oil has a $70 break point and perhaps aside from messing with Russia our anti keystone president is in choots with the saudis to kill the pipeline and screw Russia too.

I think it may be an attack against Russia.

Russia heading for crash as ruble plummets

Russia's economy is crashing and its currency appears to be in free fall.
The ruble plunged by about 12% Monday, meaning it's lost nearly 50% against the dollar this year. Early Tuesday in Russia, the central bank hiked its key interest rate for a sixth time this year to 17% from 10.5%.

A double-whammy of collapsing oil prices and Western sanctions is driving up inflation. Cash is flooding out of the country and the risk that some Russian companies may default is increasing.

Source

It seems like a well played plan to either get rid of Putin or force him to play his hand.

a reply to: CrikeyMagnet

I saw something similar to this happen in South Africa in the late 80's. After years of demanding that mandela be released, the political wing of the IMF, specifically the UN and the IMF delivered an ultimatum through Oppenheimer (Ango-American/de Beers) demanding the release of mandela or the IMF would flood the market with russian diamonds to collapse the economy of South Africa. de Klerk who was already bought and paid for, did what Oppenheimer wanted and had the government buy the diamonds, which extended capital systems a bit. But then the IMF came back two weeks later and used the the same extortion tactic, except with gold. de Klerk, according to plan, capitulated and mandela was released, 4 years later the corrupt marxist terrorist party, the ANC (manela's party), was put in power and South Africa has been ruined ever since, but the resources are cheap and you can buy damn good diamonds at about 4 cents on the dollar.

Generally, in every extortion there is a "if you don't do ***this***, I will do ***that***."

It is very possible that the same premise underlies this situation with oil, we just don't know who is demanding what, we just know the, "I will do ***that***" part, is being done. The "if you don't do ***this***" part could be any number of things that could involve more lax international banking, fewer regulations on offshores, oil extraction abatement, reduction in oil exploration, stopping fracking, etc., there are a number of possibilities. I don't think the Saudi's are doing this on their own, I'd propose that it's their handlers.

So, I'd say it's someone extorting someone for some for a gain, real or perceived.

Cheers - Dave

a reply to: neo96


Fracking looks like one of the stupidest ideas ever conceived on this planet, I kinda like it to get killed.

Nice, premium costs what regular did last month, I like that too.

originally posted by: K_OS
I think it may be an attack against Russia.

Russia heading for crash as ruble plummets

Russia's economy is crashing and its currency appears to be in free fall.
The ruble plunged by about 12% Monday, meaning it's lost nearly 50% against the dollar this year. Early Tuesday in Russia, the central bank hiked its key interest rate for a sixth time this year to 17% from 10.5%.

A double-whammy of collapsing oil prices and Western sanctions is driving up inflation. Cash is flooding out of the country and the risk that some Russian companies may default is increasing.

Source

It seems like a well played plan to either get rid of Putin or force him to play his hand.

I wonder if Putin will use the gold backed Rubel card soon. I think the plan was for the petrodollar to hyper inflate first so that the dollar debt was easily paid cheaply off in resources and let China be the first one to reveal the gold standard.

But that have not happened yet and China is still buying gold for petrodollar. Strong dollar and low gold price. Good for China to get rid of those petrodollars for physical gold.

originally posted by: neo96
Seeking an "Economics for Dummies" - What up with oil prices anyway?


Saudi Arabia is trying to kill fracking.

That's all there is too it.

Consider this: What happens when we stop fracking and Saudi Arabia raises the price? Our companies jump right back into the fracking game... even if it's expensive it provides too much national leverage to not happen, we'll subsidize it if necessary.

Saudi Arabia can only kill fracking be keeping the price of oil low. But if they try to deflate it for too long the other OPEC nations will run out of cash and turn on the Saudi's.

originally posted by: dogstar23
a reply to: CrikeyMagnet

My understanding is that the falling price of oil this time around mainly has to do with the strong USD (and the expectation of continued strong/stronger USD.)

So that will bring us to another question around the reason for the strong USD. After years of "quantitative easing", why has that not driven the US Dollar into the toilet? Is it because so many others were duped into borrowing equivalent amounts of money to offset the dilution of the currency? It seems like that should be a different thread, though.

I guess what I see of the world economy today, and what we all seem to agree on is that there's an elaborate she'll game we are not really meant to understand which dictates who gets away with how much and for how long, and there are the "Where are my pants?" distractions that lead us to believe it's all above our pay grade to understand it.

Wow. We live in stupid times.

a reply to: snowspirit

Thanks. Now it finally makes sense! May as well enjoy it while it lasts cause once the Arabs knock off all the players we'll be back to record breaking highs.

originally posted by: peck420
a reply to: roth1
If the target is Russia, why is OPEC's official target point above Russia's break point?

Russia's break even point is $105 dollars a barrel, so not sure what you're on about there.

But, in a nutshell, this is just oversupply in a market owing to a glut of production from non-OPEC countries, specifically the US, coupled with low demand from a slowing Chinese economy. OPEC is right, the market will stabilise but I think the period of high oil prices benefiting countries like Russia and Iran is over.

Decent article on the Oil price situation from The Guardian.