"Why Is Oil Priced The Way That It Is?" (plus laser equipped sharks)

The author of this piece, Robert Rapier, has been observing and commenting on the passing parade in the energy biz for quite a while.*

Via OilPrice, July 13:

• General misunderstandings of how the oil market works are running rampant.
• Oil isn’t priced the way that it is because of greedy corporations, but because of something much simpler; supply and demand.
• The people outraged at oil companies todayy didn’t care about 2020 bankruptcies, yet those bankruptcies from 2020 helped set the stage for supply shortages today.

People who should know better are still deflecting the blame for high oil prices onto the oil companies. There is still a widespread misunderstanding of how oil and gas are priced. Further, I find that a lot of people think the fact that gasoline prices are at record highs along with oil company profits means oil companies are definitely gouging consumers. “Explain this!”, they will say, while showing me some link about Chevron’s profits (as if this revelation will finally make me see the light).

So I thought of a story to help readers understand.

I like to use analogies to break down complex topics into simple and relatable problems. Obviously an analogy isn’t perfect, but its purpose is merely to increase understanding.

I shared the following story on Facebook last month, and it resonated with people. Some suggested that it should be an article, so here it is.

The Chicken Farmer
Imagine that you raise chickens. You have a large operation, so you don’t sell your individual chickens to your neighbors. You take them to a market where they are auctioned off each week.

Sometimes the demand for chicken is strong. Maybe there is a season when people tend to eat more chicken. The price people are willing to pay — because everyone wants a chicken — goes up and you make more money.

Sometimes supplies are short. Perhaps your fellow chicken farmers had some bad luck with bird flu and they have fewer chickens for sale. If supplies are short and demand is strong, then you make more money.

There may be times when you make far more money than it cost you to raise your chickens. A windfall, if you will. People get angry with you for making more money at their expense. They may demand that you lower your price for your chickens, even though that price is being set at the auction.

Then there may be times when there is a bumper crop of chickens, but because of changing preferences, the public has decided to eat fish. Perhaps there is a widespread belief that the future belongs to the fish farmers.

You take your chickens to market, but you get far less for them than it cost you to raise them. You lose a lot of money. If you lose too much, you decide to exit the chicken business. This is going to impact chicken supplies in the future. But hey, as long as everyone is eating fish, no problem, right?

Whom did you gouge in this process? Sure, there are times when chicken prices were high and you were making a lot of money at the expense of your fellow citizens.

But that’s because people in that chicken market were all trying to get chicken. They were competitively bidding up to what they were willing to pay, not shelling out more because you decided to sharply raise the price of chicken....

...MUCH MORE

*Our last visit with Mr. Rapier was almost a year ago in "Highlights From The BP Statistical Review Of World Energy 2021" where the outro went a bit off the rails:

....Mr. Rapier is one of the long-lived commenters on things energy/environment, Here's a link from 2011: "How Much Are You Willing to Pay to be Nuke-Free?" and another from 2009: "Conoco Chief Says Replacing Oil May Take a Century. And: Oil Prices Ahead of Fundamentals (COP)" and yet a third where he questioned high-profile analyst, author, investment banker Matt Simmons on the cost of the Deepwater Horizon disaster in the Gulf of Mexico. Mr. Rapier was right, Mr. Simmons was wrong in his trillion dollar estimate.

And us? Among other things we were linking to stuff like: "'More BP Gulf Oil Spill Conspiracies Flourish -- From Algae Farms to Armed Dolphins' (APC; BP; HAL; RIG)"

Which reminds me, I should probably follow up on the Chinese Security Law posts which for some reason included this tidbit:

‘At Huawei, we’re not attaching laser beams to the heads of sharks’

—Alykhan Velshi, Vice President, Corporate Affairs, Huawei Technologies Canada, Markham, Ont.

Letter to the Editor, Maclean's Magazine, published July 23, 2019

Personally I think laser-enhanced sharks would be kind of cool, it's the required handing over of data should the Chinese government request it that gives one pause.

Here's the 2022 "Energy: The New BP Statistical Review Is Out"