24 Dec International oil prices (using comics)
As usual, in this space I don’t try to do a detailed and academic research on the subject, at contrary my desire is to bring this sector (that I love so much) to people who don’t work on it, that’s why I used the word “comics”.
First with the theory as a hypothesis and a rustic graphics… as I told someone the other day, I would like to be a good artist, so this post will be much more accurate and entertaining. Anyway, let’s start.
Here you find the basic scheme of analysis, with the drawing of a drilling rig I represent the producer (supply) with a person in suit and tie I represent the consumer (demand), with a barrel of oil I represent the volume of oil production, the “$” sign next to the producer represents the economic cost of production and finally the “$” sign between the barrel and the consumer represents the level of oil prices.
Suddenly an increased in oil demand happened, that is… more little men:
With so much demand an increase in the production was necessary, but of course was not free; these new “little men” had to pay a higher price “$$$$$$” to encourage production in “expensive” fields, notice the high cost of the new “deeper” and “offshore” wells:
Did you see the happy face? Well, original producers are very happy because their cost is “$” but now the new price is “$$$$$$”. In this context, with a very attractive price, a group of new producers entered in to the market with new technology and lower production costs ($$$), something like this:
As shown in the figure above the new technology “fracture” the structure with water (can you see those “little spiders” in the figure?) With a cost “$$$”.
This new cost “$$$” angers high-cost producers, as shown below:
Why are they angry? Precisely because their production costs are higher than the new price. In this way, the new technology with a selling at a lower price “$$$” and accompanied by a fall in the number of little men (demand), displaces high-cost producers:
Additionally, the original producers (those with cost “$”) increase their production.
“More or less” in this way many analysts explain the current fall in international oil prices where: a) most of the additional “little men” represent China; b) the new technology of “little spiders” is the shale oil production in the United States of America; c) much of the original producers represents the production of Saudi Arabia, where they didn’t decide to reduce production (even more, they increased the production).
Now let’s see if statistics support these ideas. The following figure shows the main oil producing countries in the world: United States, Saudi Arabia and Russia (with data from the Joint Organisations Data Initiative) .¡Very interesting! The increase of oil production in the United States is remarkable, more than 2 million barrels per day and, during the first half of 2015 the production of Saudi Arabia also increased. Thus, the data do not reject the explanation provided above.
The figure below shows the rate of growth of China oil demand, it’s clear that in recent years an appreciable slowdown is observed.
As shown, the oil world is always exciting and moving (to paraphrase Yoda) where markets immediately react to disruptions in supply and demand. Naturally, many readers discussed (and not without reason) that this analysis ignores geopolitical variables… this shall be the subject of another blog.
Well my friends, thank you very much for spending time with this blog. To receive my posts in your email please send me a message to [email protected] and, using the words of my son, you can follow me on my twitter (click) and Facebook (click).
Mauricio Medinaceli Monrroy
Kabul, August 11, 2015
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