Saturday, June 21, 2008

High Gas Prices and Saudi Math

The reason why I keep bringing up the Saudis and their production is that they hold the firmest hands on the reigns of the oil supply. First one must understand that the Saudis are not producing oil at capacity.

Have you ever wondered why 15 of the 19 9/11 hijackers were Saudi Arabian national, were commanded by another Saudi national, and the Bush administration leads a charge against a battle torn goat haven and a weak cobbled together country like Iraq with not ties to the event? Or have you ever wonder why the leader of the free world travels to the Saudi Arabia and wallows at the feet of the oppressive Muslim King that stands for everything that Americans are against? Oil, bloody oil. So how did the Saudis come by so much respect? A little situation we all Call OPEC.

A few years ago I had an economics teacher. He was an awful teacher. But he did give me one nugget of enlightenment. He explained how OPEC operates. The jest of it goes like this. Originally OPEC was created as a kind of oil conglomerate. The members were all going to combine their resources and corner the oil market. They were going to do it by setting the production levels and control the supply and demand ratio. The problem is that they would set a production level for the year, but then many of them would "cheat" and over produce by several hundred thousand barrels. So, the Saudis having a better grasp on economics then their partners decided to get control of the ramped "cheating". They figured out the amount barrels each member could produce, and then the Saudis set a market supply level by only producing the amount they needed to make up the difference between the rest of the OPEC members production and the level they set.

To understand how this works, you have to understand a few economics concepts. More precisely the pricing curve. You have to understand Saudi Math. Here is an example.

Story problem: Lets say that at $2 a gallon a gas station has a 100 consumers willing and able to buy a gallon of gas. (we will make it "a gallon" for ease of math.) But let us say that at $4 a gallon only 50 of the consumers are willing and able to pay for a gallon of gas. Guess what! The gas station is making $200 either way!! Now if you are talking about an industrial venture such as oil drilling, selling less product means less overhead cost, which mean you are actually pocketing more money. There is not shortage of people willing and able to pay the price
If the US produces more, the Saudis will just decrease production, prices at best will slow their increase, and in the end The Saudi oil industry will make more money. They didn’t even need Sally Struthers to show them how to do it.

The aforementioned explanation is why drilling in ANWR won't do any good. There are many other subsidiary reason I will put in a different post. However just know this much. All oil is deposited in a giant global kitty. There are no "strictly American" supply chains. The U.S contributes only 2% of the world's oil production. The raw data can be found here in the International Energy Agencies "Annual Statistical Report". You will have to do a little averaging math. It takes one who doesn't sleep to go further and find out that if ANWAR produced 100% of its speculations, it would only increase oil output to 6%. (The record high has been less then 50% accuracy. ) The U.S. consumes 25% of the worlds oil production. If we increase, the Saudis just decrease and then bring home the same payday. People who think drilling is the answer are either ignorant, stupid, or on the payroll of one of the companies. They still have a 100 million acres they have access to that they are not drilling on.

The only thing we can do I cut our use.

1 comment:

Zak said...

Dwight, you need a few more tenant farmers to make it to King! Dude! The IPA's kicking in so on the downlo I can tell you this is the first blognod I'm giving; to you so I don't have to await moderation by the one from WHYS once associated with the old empire.

Anyway, on to the topic at hand. Here's one for you, do you know how many Saudi Bin Laden's were flown out of the country in secret under the 'no fly zone skies' after 9/11? Point being: Bush has had his hands in those Saudi pockets all along. So you can be sure there are some major profits swinging down on the ranch Texas way. Osama was even once given a prominent position in 'the company' until he went attention crazy and picked up his AK-47.

But again the more I weigh how much interest Bush had with 'the family' and how much mafioso type activity there was between the Saudis Iranians and Russians, I think this may have shifted the real premise in Bush's mind to the war on OPEC, in theory, when he was waging the 'war on terror'. You could break that down further to get specific, his supposed mistaken bombing in Uzbekistan that really lost strategic position in the region; but then what did he really need strategy for when the oil target was West with the sun.

Counter text

New counter