Sunday, December 11, 2011

Explaining more at the well means less at the pump - for gasoline.

First, another link telling more positive news coming from U.S. energy production: US Oil Shale Seen Rising Fast

The Saudis have used production to control prices since 1973, when we had our first oil embargo, courtesy of them and Henry Kissinger. They know this game. It's too obvious that increased supply puts downward pressure on price. What is not so obvious is the vicious circle this can catch the market into riding. If the Saudis feel compelled to maintain revenues large enough to generate near same gross profits that they have for so long, before this new competitor arrived, they have to pump more to make up for lost margins when new supply drops prices. That additional quantity in the market further presses down on prices, leading to another decision to live with less profit or increase supply again until revenues generate profits equal with the past. This could continue until the market becomes saturated and no increases in supply can be bought up. This is a classic equilibrium sequence for any market.

The flip side is that the Saudis could elect to withdraw production in order to keep prices where the margins for profit are maintained. The risk for the Saudis is that the lost gross profits might not sustain their hold on their kingdom, which is now that of a benevolent king. Well, in a few regards. They can be brutal when it suits them. They could choose a chancy road of supression of their subjects, but then spring might come to Saudi Arabia. They don't want that. One other choice they would have would be to cash in their holdings of American assets, until that runs out. Lastly, thet can choose a more frugal lifestyle, which if that were in them, one might think they would have already done so in order to quiet criticisms of their lifestyles juxtaposed against that of their tent bound, camel ridden subjects.

Its going to be interesting.

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