6 ms·

Oil Crisis Explained in 3 Minutes

50 points by kyu 12y ago

stickperson 12y ago
Knowing absolutely nothing about oil and the industry, I don't view paying $3 a gallon now vs $4.29 a couple months ago as a "crisis."
- minimax 12y ago
  If you look at it from the perspective of a city like Houston, where a big chunk of the local economy is driven by the oil industry, you can see why it's a big problem for some people. http://www.houstonchronicle.com/business/energy/article/As-oil-price-falls-city-remembers-and-prepares-5846303.php http://www.houstonchronicle.com/business/energy/article/As-o...
- fargolime 12y ago
  Enjoying deflation is un-American! I don't get it either.
- giarc 12y ago
  I live in an oil rich province and many of my friends are worried about their jobs.
- mikeyouse 12y ago
  Basically, many economies suffer from the "Dutch Disease" where the easy profits in oil and gas crowd out all investment into other parts of the economy. The massive export economy props up the currency as well to the detriment of other exporting businesses. When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain.. http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2 http://www.economist.com/blogs/economist-explains/2014/11/ec...
fffrad 12y ago
Something I do not understand: - barrel price went from $100 to $60. That's $40 drop. - Price went from $3.60 to $2.80 a gallon in my city. That's $0.80 only I don't get it.
- ibmthrowaway218 12y ago
  http://www.investopedia.com/articles/economics/08/gas-prices.asp http://www.investopedia.com/articles/economics/08/gas-prices... The cost of the raw crude oil is only part (but a significant part) of the pump price. It's more 'fun' in the UK where fuel duty and other taxes (VAT) form the majority of the pump price:- http://www.petrolprices.com/the-price-of-fuel.html http://www.petrolprices.com/the-price-of-fuel.html
- kyu 12y ago
  Great point. 40% drop in oil prices vs. a 22% drop in gas prices. Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way. There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there. I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.
  - jdrols 12y ago
    > Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way. This is a gross simplification. I'm not an expert or someone with a deep understanding of how gas stations work, but even I understand that a barrel of crude requires a complex process to turn it into gasoline and even more logistics to get it to the pump. Every one of the people in that process needs to be paid, including your friendly neighborhood gas station cashier. This line of thinking is the equivalent to wondering why the price of a new car hasn't decreased if steel prices hypothetically dropped. Most products cost much more than their raw materials because to change them from raw materials to products and to put that product on a shelf requires the hard work of many people.
- 12y ago
Sven7 12y ago
Time for some shale driller bailout planning. If it breaks OPEC it's good for everyone. The unholy amount of funding that supports global terrorism will take a big hit.
innguest 12y ago
Why does the author keep saying "If OPEC doesn't interfere"? Is the author in favor of price-fixing? I thought all sane human beings understand that a monopoly controlling the price of something is bad. That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.
- civilian 12y ago
  I also read an article talking about how the Saudi's wanted to ruin Iran. And another one about how they want to ruin Russia. I feel like any simple explanation like that is probably wrong. They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production. http://www.economist.com/news/finance-and-economics/21635510-what-oil-cartel-up-making-best-low-price http://www.economist.com/news/finance-and-economics/21635510... However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.
jaddison 12y ago
I'm admittedly naïve in this, but wouldn't it make financial sense to buy OPEC based oil stock in the coming few months? Based on whether this is true, of course - so... In theory naturally.
- desdiv 12y ago
  All the OPEC oil companies are state-owned. That's how the OPEC countries are able to control their production numbers.
tracker1 12y ago
Why not just implement tariffs on foreign oil?
- crpatino 12y ago
  You'd need to have enough local oil to pick up the slack. For what I know, US has been a net importer for decades... Or maybe there are enough reserves, but they are in the long game and want to buy the foreign oil first... while the taking is good.
  - tracker1 12y ago
    Tariffs don't need to make foreign oil go away, only be strong enough to level domestic competition a bit. A $40/barrel tariff would still leave very low oil prices for imports, but at least allow for domestic competition... it isn't about totally squeezing a market out, only leveling some unfair trade practices that would hurt consumers/citizens in the long run.
_nullandnull_ 12y ago
Shucks, fracking is no longer profitable. I was really looking forward to more earth quakes and flammable tap water.

50 points by kyu 12y ago

Knowing absolutely nothing about oil and the industry, I don't view paying $3 a gallon now vs $4.29 a couple months ago as a "crisis."

minimax 12y ago
If you look at it from the perspective of a city like Houston, where a big chunk of the local economy is driven by the oil industry, you can see why it's a big problem for some people. http://www.houstonchronicle.com/business/energy/article/As-oil-price-falls-city-remembers-and-prepares-5846303.php http://www.houstonchronicle.com/business/energy/article/As-o...
fargolime 12y ago
Enjoying deflation is un-American! I don't get it either.
giarc 12y ago
I live in an oil rich province and many of my friends are worried about their jobs.
mikeyouse 12y ago
Basically, many economies suffer from the "Dutch Disease" where the easy profits in oil and gas crowd out all investment into other parts of the economy. The massive export economy props up the currency as well to the detriment of other exporting businesses. When profitability is hurt by lower prices, these natural resources firms all pull back at the same time and there is no other industry that can take up the slack. The declining capital investment, jobs, and tax base all lead to pain.. http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2 http://www.economist.com/blogs/economist-explains/2014/11/ec...

fffrad 12y ago

Something I do not understand: - barrel price went from $100 to $60. That's $40 drop. - Price went from $3.60 to $2.80 a gallon in my city. That's $0.80 only I don't get it.

ibmthrowaway218 12y ago
http://www.investopedia.com/articles/economics/08/gas-prices.asp http://www.investopedia.com/articles/economics/08/gas-prices... The cost of the raw crude oil is only part (but a significant part) of the pump price. It's more 'fun' in the UK where fuel duty and other taxes (VAT) form the majority of the pump price:- http://www.petrolprices.com/the-price-of-fuel.html http://www.petrolprices.com/the-price-of-fuel.html
kyu 12y ago
Great point. 40% drop in oil prices vs. a 22% drop in gas prices. Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way. There's also the fact that the oil prices generally reflect future prices. Gas stations need the physically delivered commodity. There's some small fluctuations there. I don't have a deep understanding of how gas stations work, if anyone else has insights would love to hear them.
- jdrols 12y ago
  > Bottom line is that gas distributors don't have to precisely reflect the drop in oil prices at the pump because they can make more money that way. This is a gross simplification. I'm not an expert or someone with a deep understanding of how gas stations work, but even I understand that a barrel of crude requires a complex process to turn it into gasoline and even more logistics to get it to the pump. Every one of the people in that process needs to be paid, including your friendly neighborhood gas station cashier. This line of thinking is the equivalent to wondering why the price of a new car hasn't decreased if steel prices hypothetically dropped. Most products cost much more than their raw materials because to change them from raw materials to products and to put that product on a shelf requires the hard work of many people.
12y ago

Sven7 12y ago

Time for some shale driller bailout planning. If it breaks OPEC it's good for everyone. The unholy amount of funding that supports global terrorism will take a big hit.

innguest 12y ago

Why does the author keep saying "If OPEC doesn't interfere"? Is the author in favor of price-fixing? I thought all sane human beings understand that a monopoly controlling the price of something is bad. That's why the author did not mention the reason that "OPEC doesn't interfere" is that the Saudis are waiting for this new price level to bankrupt the Shale enterprise in the US.

civilian 12y ago
I also read an article talking about how the Saudi's wanted to ruin Iran. And another one about how they want to ruin Russia. I feel like any simple explanation like that is probably wrong. They realize that OPEC doesn't have enough of a majority of the production to take true advantage of lowering prices. America isn't part of the cartel, so our shale companies would be making out with a lot of money, b/c they're not going to lower production. http://www.economist.com/news/finance-and-economics/21635510-what-oil-cartel-up-making-best-low-price http://www.economist.com/news/finance-and-economics/21635510... However, yeah, it's definitely weird how some journalists are coming out in favor of cartels in this scenario. I assume it's from not having a well-rounded education.

jaddison 12y ago

I'm admittedly naïve in this, but wouldn't it make financial sense to buy OPEC based oil stock in the coming few months? Based on whether this is true, of course - so... In theory naturally.

desdiv 12y ago
All the OPEC oil companies are state-owned. That's how the OPEC countries are able to control their production numbers.

tracker1 12y ago

Why not just implement tariffs on foreign oil?

crpatino 12y ago
You'd need to have enough local oil to pick up the slack. For what I know, US has been a net importer for decades... Or maybe there are enough reserves, but they are in the long game and want to buy the foreign oil first... while the taking is good.
- tracker1 12y ago
  Tariffs don't need to make foreign oil go away, only be strong enough to level domestic competition a bit. A $40/barrel tariff would still leave very low oil prices for imports, but at least allow for domestic competition... it isn't about totally squeezing a market out, only leveling some unfair trade practices that would hurt consumers/citizens in the long run.

_nullandnull_ 12y ago

Shucks, fracking is no longer profitable. I was really looking forward to more earth quakes and flammable tap water.