Why is the media constantly repeating the false idea that a low oil supply is causing the current price shock?

Question

The Saudis say supply is meeting or exceeding demand but almost every story out there cites low supply as a major factor for gas prices skyrocketing.

Answer 1

Actually I do not think anyone has said there is a low oil supply.  However, what is true, is that the output is largely fixed at this point.  It is quite possible that the world has hit "peak output," in oil production.  If it hasn't, it is likely just a few years away.  Peak oil production comes from the fact that it appears that oil production can be understood as a differential equation that is a quadratic loss function.  The best model for this is American oil.  The United States hit peak oil production in the 1960's.  It isn't that the supply is small, but rather when you hit peak production then output stops being flexible.

An example of this is Saudi Arabia.  The Saudis were asked two year ago to up output and they agreed they could, but only in sour crude, which isn't very useful.  The price shock is due to the fact that supply is becoming inflexible and demand is not inflexible.  Adding US supply, although it would have a large price effect, would not have a large supply effect.  Small changes in supply have very large changes in price.  Prices are very elastic and have been for years.

The reason it is hitting Americans so hard is that prices for commodities are set by the marginal buyer.  The person who has no flexibility has no say in the price.  A person addicted to cocaine has no say in the price of cocaine, only the person who is still not addicted and can choose some other thrill can negotiate prices.  A nation addicted to oil has no say in the price.  Nations like China and India are the marginal nations.  They decide oil prices for the rest of the world, because they are deciding how much oil to use in their economies and what their substitutes might be.  For the United States to have a say, rather than go on a mass drilling campaign, the US needs to allocate substantial sums to alternative energy sources to make itself a flexible economy.

I happen to have a family member who is a former senior geologist at Shell.  He is an antique dealer now.  We had a conversation about this ten years ago.  It was rather interesting to see oil from an insiders perspective.  This isn't a surprise to anyone in oil and it isn't really a surprise to Congress or the Energy Department.  In democracies you do not sound the warning bell early, because the changes you would have had to make would have been politically uncomfortable at the time.  Consider, for example, Bill Clinton's carbon tax that was soundly defeated, to make America more energy flexible.  There was no way Americans would fund the economy with expensive fuel sources when cheap ones were still available.  So, you get foolish presidents like Clinton who try and stop the train wreck and lose political capital, and you get twice elected presidents like Bush who ignore the problem until it hits a flash point.

This is basic economics, you have a nearly vertical supply curve and and upward shifting demand curve.  The shock will be huge.

Answer 2

It is like our govt, they get paid to report things. With all the news today, all the crime and every channel reports the same things. No, I do not think so. It always boils down to money. They try to tatoo it to our brains. Now, I love money too. But, I have to earn it.

Answer 3

They have to blame it on something. They're just idiots if they think we believe that we're running out of oil. The reason for the price shock is because they won't open more refineries, simply because everyone is just NOW starting to worry about global warming. If people would have done something about it before, then gas prices would be lower and our world would still be healthy. They just want to blame something else and make it so its not the government's fault.

Answer 4

Because oil companys are extremely powerful and they have their fingers in everything. The media is there to make money. Journalistic integrity over money is becoming extinct. I suggest people steer clear of the lies,manipulation and imposed opinions of mainstream media.

Answer 5

I can answer this one they dont want to reviel the real truth

Answer 6

because they want us to keep believe that there is one but truly there is not one there is still a lot of oil out there for us to use but because of 9/11 the govt of the US didn't want to have bad ties with the people of the middle eastern. They were scared that the oil would be cut off so they paid them more money. how do i know this i work for the federal govt

Answer 7

I just watched CNN’s  international Channel(3pm EST), breaking  the news that oil price spikes again.  But the anchor and the reporter assert it is China’s diesel demand contributed to the hike.

Waited a sec !  It is already THIRD time I am hearing CNN’s assertion of China’s diesel demand. The first time was about two weeks ago. What’s going on?

Then, Israel’s-Iran-attack-drill news flashing back-------Which Was Just Happened This Morning !  That “unmistakable signal”  is surely an act to have a consequence of  oil supply disruption !  Why is it not reported as a oil spiking cause ? !

Time to scapegoat China again before a major offensive ? To verify, I went to CNN web site , there it is :

China hikes fuel prices http://money.cnn.com/2008/06/20/news/int...  

China to raise energy prices

http://money.cnn.com/2008/06/19/news/int...

But  nowhere saying that Israel’s-Iran-attack-drill  will unstablize the oil supply region, causing the oil  price up.

For Israelis Iran Strike Drill see

http://www.jpost.com/servlet/Satellite?c...

Answer 8

Why do you think it is a false idea?

Oil is a means of production for nearly every item sold in the market.

Anything that is transported is affected by oil prices. And many consumer items, particularly electronics and machines have 5,6 or 7 steps in their production. All of these steps involve transport that involves oil. Oil goes up, transport goes up, the price of the end-product goes up.