Supply, meet demand

The Government’s inquiry into oil companies’ pricing structures will delight those who see the companies acting in concert to exploit Kiwi consumers.

If there’s a local conspiracy, then the place to look may be offshore, at the prices paid for the oil that we import. In a former life as an energy economist I was always intrigued that officals in the oil area were convinced that transfer pricing reduced the profit margins (and hence NZ tax take) on the oil refined here. But that was a long time ago, and transfer pricing wouldn’t necessarily affect the price paid at pump.

Still, if it’s not just a “fairly desperate attempt to be looking like it’s doing something”, then the Government must know something we don’t. There may be something in it, but it seems unlikely to make more than a little difference at the margin.

After all, the US Congress has reportedly held five hearings in the last 3 months seeking the reasons for the oil crisis. George W Bush and Gordon Brown are scheduled to meet today to try to nut out a solution. Anyway, doesn’t the Commerce Commission monitor these sorts of things closely?

It’s interesting to watch the debate raging internationally about the reasons for the current crisis. Is it all down to supply and demand, or has the vast increase in speculation on oil futures got something to do with it, as the producer countries argue? (See the Herald’s excellent review for more details.)

Clearly, demand for oil, particularly from China and India, has been outstripping supply. Don’t forget though, that demand in the West continues to rise. To make matters worse, the oil exporters can’t increase exports fast enough. I’m inclined to think that while the speculation may be exacerbating things right now, it’s not a bubble. It’s mostly structural. Don’t expect to see petrol at $1 a litre any time soon.

Elsewhere in the NZ blogosphere…

Over on kiwiblog, Farrar blogs mostly on the FuelWatch scheme. But he concludes that, “we need to make sure people can afford the cost of petrol which means higher after tax income.” Fortunately, a sane person pointed out that, “there is no point in increasing after tax income if we are just going to funnel more money to overseas oil companies. It would be more economically efficient if we obeyed the price signal and just spent less on oil.” The kiwiblog right quickly identified higher interest rates as responsible for the higher prices. No, true.

Also on kiwiblog, Tane W patiently the supply & demand factors in operation to the KR before asking, “So, anyone still keen to build new motorways?” Came the response, “Yep and a nuclear powerstation to charge my hybrid with.” He’ll know better than to pose rhetorical questions to the KR in future.

The Standard suggests that we should face up to peak oil and adapt our economy a world without cheap oil.



2 Responses to “Supply, meet demand”

  1. MacDoctor Says:

    I get the sense that both the oil companies and OPEC are a little perplexed by the price of oil. I am fairly sure that the recent rapid rise is just speculation driven. After all, if it was a simple supply and demand situation, you would have to assume there was a sudden (over the past 6 months or so) mismatch between supply and demand. In world market terms, that would be HUGE – like half of OPEC shutting down completely or China and India doubling their consumption in less than a year. I don’t see anything like that, so I’m going with the biggest driver being speculation. This makes sense if you recall that all the money previously flowing into housing has to go somewhere.

    Whenever you get the toxic mix of greed and stupidity, you get a bubble that will blow up in the faces of those not quick enough to get out of the way. I expect oil to head down to $100/barrel or lower, although it might take a big shock like a new oilfield coming on line to do it.

  2. jafapete Says:

    Mac, I take your point about speculation, but that can’t be more than a short-term factor. Also, if that’s the case then someone’s destined to lose an awful lot of money.

    I heard the worst offending oil company denying on the radio this morning that petrol prices go up faster than they come down. Yeah right!!! If nothing else, I hope that the announced inquiry nails this practice. I currently try to buy from Gull and Shell, who seem to be the local heroes when it comes to not ratcheting up the price at the first opportunity. I won’t mention the main culprit, but you must all know who I mean.

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