ECONOMICS OF OIL

March 3, 2015
 Topics - Economics of Oil

• Price changes over time / Price formation

• World supply and demand
• The U.S. demand and imports
• World proved reserves / Are we running out?
• Components of gasoline price at the pump
Oil Price: Great Price Volatility over Time. Why?
External Econo-Political Shocks and Price
The SR Supply and Demand Elasticity

Inelastic S and D
- ED gasoline = 0.2 (SR)
- Production constraints (SR)
The S and D shifters?
Supply: War, embargoes, OPEC,
natural disasters, exploration,
fracking.
Demand: The business cycle,
conservation, and substitutes
Expectations, and
speculative Investors.
The SR Supply and Demand Elasticity
 Price changes

• Changes in supply or demand have large

impact to price, small impact to quantity
• Recent changes worldwide
• Recent changes US
Price changes
World Oil Supply
World Oil Supply
The World’s Top
Producer of Oil is also…
• ..the world’s top importer of oil. Why?
 The World Daily Oil Consumption
- by Country (2014), Barrels per Day
# 1   United States: 19,400,000  
# 2   China: 10,400,000
# 3   Japan: 4,367,000
# 4   Russia: 2,858,000
# 5   India: 2,722,000
# 6   Germany: 2,456,000 
# 7   Brazil: 2,372,000
# 8   Canada: 2,371,000
# 9   Saudi Arabia: 2,311,000
# 10   Korea, South: 2,214,000  
USA in a
class of its
Total: 91,000,000 bbl/day own!
 The Volume of U.S. Oil Imports

Note: From 10M Barrels / Day A decreasing

to 6.6 M Barrels/Day dependence on
in six years oil imports
[U.S. Daily consumption is 19.4M. Barrels/Day]
The U.S. Crude Oil Imports
- by Country (thousand barrels per day)
2009 2012
1. CANADA 1,956 1,938
2. MEXICO 1,187 1,096
3. SAUDI ARABIA 1,503 989
4. VENEZUELA 1,039 965
5. NIGERIA 922 771
6. ANGOLA
7. IRAQ
504
627
449
448 Friends
8. BRAZIL 231 294
9. ALGERIA 312 277 and
10. COLOMBIA 178 254
11. RUSSIA
12. KUWAIT
116
206
232
185
Foes
13. ECUADOR 214 174
14. AZERBAIJAN 73 75
15. CONGO (BR) 67 64
The Business Goes On…
The Hubbert peak theory for any given
geographical area, the rate of
petroleum production tends to follow
a bell-shaped curve.

Early (pre-peak), the production rate

increases because the discovery rate
and infrastructure. Later (post-peak),
production declines because of
resource depletion.
 Reserves Will the
Rank Country
(MMbbl) world run
1  Venezuela  298,350 out of oil
2  Saudi Arabia  268,350
in the
next few
3  Iran  173,625
decades?
4  UAE  157,300 No, for
5  Iraq  140,300 two
6  Kuwait  104,000
reasons…
7  Canada  97,800
8  Russia  80,000
9  Libya  48,014
Reserves /
10  Nigeria  37,200 Daily use
= _______
11  United States  30,529

TOTAL WORLD 1,481,526

 The Price of Gas at the Pump
• 2010 2015
The ones
who make
the big
money
are…
 Have an Oily Day!]

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