4 ms·

Oil supply is fairly demand inelastic, if demand for oil drops, we'll almost certainly see cheaper oil. And if OPEC sees the writing on the wall they're going

Oil supply is fairly demand inelastic, if demand for oil drops, we'll almost certainly see cheaper oil. And if OPEC sees the writing on the wall they're going to price aggressively as long as they can.

RetpolineDrama 3y ago
Really? Because I would think refineries/wells start shutting down the second their profit goes negative.
- kube-system 3y ago
  The high-cost suppliers in countries where cartels are illegal do. Which is why fracking busts and booms in the US as prices change around the world for other reasons. But there's enough places in the world where oil flows with minimal effort to sustain low prices in a world where demand is decreasing.
- bluGill 3y ago
  That isn't how it works. Oil wells cost a lot of $$$ upfront to get the first drop of oil. Every liter of oil after that is practically free - there is a little electric or gas needed to run the pumps, but that is so little it doesn't count. Most of the cost is in finding a spot to drill, getting permissions to drill there, and then drilling. (mineral rights are really complex, but generally whoever owns them gets a % of the sale value of the crude, so if the price goes down or the well produces less they get less money) Which is to say oil wells don't shutdown when the profit goes negative because that never happens. Oil wells do shutdown (or more likely produce less because the pump is slowed) if the owner decides they want to control supply to bring the price up - but you have to have a lot of wells to even think about that. During the pandemic oil wells shutdown, but that was because there was no place to put store the oil - if you could store it there was plenty of value in pumping it (though it was an investment). Refineries don't shutdown when the profit goes negative. Again, because the sunk cost in machinery is a large part of the cost. If the profit goes down they will often not remodel and eventually shutdown because the equipment it wore out. Many have shutdown because the right crude wasn't available (and they didn't want to invest in machinery to handle crude they can get) - and then reopened a decade later when someone started pumping the right crude again. Yes of course if profit goes negative they will both shutdown. However long before profits go negative they will be managing things and so in practice they are shutdown for other reasons first.
marcosdumay 3y ago
For a while, yes. On longer timespans, the production is quite elastic as wheels dry and new ones have to be created all the time.
- kube-system 3y ago
  Right, but lower trending demand would also put more power into the hands of OPEC to crater prices and prop up demand any time alternatives start to threaten oil's dominance. They're not going to go out without a fight to the end because those economies depend on oil. I'm sure it will go on long after I'm gone from this world.
  - bluGill 3y ago
    Will they though? A large consumer of oil is cars and EVs are coming fast. Even if we assume that 5% of cars will always be fuel burning ICE for "reasons" that is such large demand destruction that in 10 years I don't think OPEC will have any power - in fact I wouldn't be surprised if most of the world just embargo all OPEC countries: they are mostly middle east areas where there is a lot of conflict and the few non-OPEC oil producers can supply the world's needs, so cutting them off from all money is a good thing for the world.
    - kube-system 3y ago
      > Even if we assume that 5% of cars will always be fuel burning ICE By the time it gets that low, I agree, they're done. We're a very long way from that. 85% of cars being sold globally are still ICE, and the population of vehicles on the road lags sales figures by a couple of decades. And even with the increase in EV sales figures, oil demand is not dropping, because the total demand for cars is increasing. But if demand for oil starts to drop due to EV adoption, OPEC is for sure going to make sure it's cheap as hell to operate an oil burning car, and people in the majority of the world where it's still legal will have a huge incentive to keep buying them.

RetpolineDrama 3y ago

Really? Because I would think refineries/wells start shutting down the second their profit goes negative.

kube-system 3y ago
The high-cost suppliers in countries where cartels are illegal do. Which is why fracking busts and booms in the US as prices change around the world for other reasons. But there's enough places in the world where oil flows with minimal effort to sustain low prices in a world where demand is decreasing.
bluGill 3y ago
That isn't how it works. Oil wells cost a lot of $$$ upfront to get the first drop of oil. Every liter of oil after that is practically free - there is a little electric or gas needed to run the pumps, but that is so little it doesn't count. Most of the cost is in finding a spot to drill, getting permissions to drill there, and then drilling. (mineral rights are really complex, but generally whoever owns them gets a % of the sale value of the crude, so if the price goes down or the well produces less they get less money) Which is to say oil wells don't shutdown when the profit goes negative because that never happens. Oil wells do shutdown (or more likely produce less because the pump is slowed) if the owner decides they want to control supply to bring the price up - but you have to have a lot of wells to even think about that. During the pandemic oil wells shutdown, but that was because there was no place to put store the oil - if you could store it there was plenty of value in pumping it (though it was an investment). Refineries don't shutdown when the profit goes negative. Again, because the sunk cost in machinery is a large part of the cost. If the profit goes down they will often not remodel and eventually shutdown because the equipment it wore out. Many have shutdown because the right crude wasn't available (and they didn't want to invest in machinery to handle crude they can get) - and then reopened a decade later when someone started pumping the right crude again. Yes of course if profit goes negative they will both shutdown. However long before profits go negative they will be managing things and so in practice they are shutdown for other reasons first.

marcosdumay 3y ago

For a while, yes. On longer timespans, the production is quite elastic as wheels dry and new ones have to be created all the time.

kube-system 3y ago
Right, but lower trending demand would also put more power into the hands of OPEC to crater prices and prop up demand any time alternatives start to threaten oil's dominance. They're not going to go out without a fight to the end because those economies depend on oil. I'm sure it will go on long after I'm gone from this world.
- bluGill 3y ago
  Will they though? A large consumer of oil is cars and EVs are coming fast. Even if we assume that 5% of cars will always be fuel burning ICE for "reasons" that is such large demand destruction that in 10 years I don't think OPEC will have any power - in fact I wouldn't be surprised if most of the world just embargo all OPEC countries: they are mostly middle east areas where there is a lot of conflict and the few non-OPEC oil producers can supply the world's needs, so cutting them off from all money is a good thing for the world.
  - kube-system 3y ago
    > Even if we assume that 5% of cars will always be fuel burning ICE By the time it gets that low, I agree, they're done. We're a very long way from that. 85% of cars being sold globally are still ICE, and the population of vehicles on the road lags sales figures by a couple of decades. And even with the increase in EV sales figures, oil demand is not dropping, because the total demand for cars is increasing. But if demand for oil starts to drop due to EV adoption, OPEC is for sure going to make sure it's cheap as hell to operate an oil burning car, and people in the majority of the world where it's still legal will have a huge incentive to keep buying them.