Question:

Have oil prices gone up because the resources of oil are running out?

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Have oil prices gone up because the resources of oil are running out?

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  1. Oil is not renewable, so yes, the resource is being depleted, but the main source of scarcity isn't how much is in the ground but rather how fast we can produce it.

    You might hear news stories about capacity and how we're near the limits, or rather how there's very little spare capacity. The machines that pump crude oil out of the ground can only bring so much up at a time, and these have been near their limit for the past two years. It is extremely expensive to improve capacity.

    There is also a bottleneck at the refinery level. Crude oil is nice, but it's not useful until it is refined into petroleum and its distillates - gasoline, kerosense, diesel, etc. Refineries are extremely complex facilities that take years to build and cost millions of dollars. In the last decade, several have gone offline or lost capacity due to fires, natural disasters, etc. Thus, even if we can pump more crude, we can't necessarily get gasoline any faster until we repair or add more refineries.

    That's the supply side. The demand side is what is key - people are driving much more than we were 20 years ago. There are far more vehicles, many of which have much lower fuel economy. The CAFE standards - which dictate "average" fuel economy for a manufacturer's fleet of vehicles - generally overstate fuel efficiency because people tend to drive larger vehicles if their lifestyle entails much more driving. I'm only in the car for half an hour each day on my 12-mile commute, so I don't care to replace my 1999 Chevy. My dad, on the other hand, commutes nearly 60 miles and so drives a much more comfortable SUV.

    We're not the only part of the demand picture - we never were the sole consumers, but now international drivers are increasing rapidly due partially to a rising middle class in China and India, and so gas consumption is increasing worldwide, which increases demand for crude oil, which drives up the price.


  2. ive heard that we lost 1/3 of the worlds oil due to hurricane katrina.  

  3. There are a lot of factors. I don't understand a bunch of it, but realize that (to use my econ-terms!) oil is an inelastic good, meaning that it will be bought no matter what the price is. If soda went up to 10 bucks a can, nobody would buy it (mostly). If oil went up to 10 bucks a gallon in the U.S., people would still have to buy it. THUS, they have us. Being an inelastic good is an important part of the supply/demand equilibrium, because they can charge whatever the h**l they like, short of a hundred dollars a gallon in which we might decide to start walking.

    We don't know when oil will run out, except that it will happen eventually. Don't forget that OPEC (Organization of Petroleum Exporting Countries) plays a role. It's far from an open market- Saudi Arabians pay like 1.40 a gallon.

    Edit: Wayne has a good answer.

  4. The fear is the increased demand will limit supply?  That makes absolutely no sense.  If demand increases, price increases this does not change supply.  I know it changes the quantity supplied by supply is a factor that is not changed by price. Increased demand is causing the price to go up.  Oil running out is not really the issue because it's not running out.  This would happen if the demand for bottled watter in China went up as well.  If China had an increase demand for ANY product, the price will go up EVERYWHERE.  So, it is really false premise to say that the supply has really anything to do with the price changing.  As I said before, supply is NOT affected by price.

  5. Mostly no...the current run up is based on fear and speculation.  Fear that increased demand in China and India will limit current supplies.

    It is much like the tech bubble and the housing market - it's starting to burst.

  6. Yes, and that's half of the equation. The other half is: No matter how high prices get, people will still pay for oil.

    They can rise the price all they want, and people will still buy. What can we say? Everyone still needs oil.  

  7. It has partly to do with demand and supply; many countries are becoming dependant on oil and yet the daily production remains unchanged..so those willing to get the oil will be eager to pay more.

    2nd reason, because the american dollar (this is the currency used for valuation of oil) is very weak at the moment...most of the blame is on this factor. eg with £100 one could have obtained $190 about 3 yrs ago, now for the same £100 one can get $235-240.

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