The Real Price of Oil and the Ghost of Matthew Simmons - Statistics Project Example

The Real Price of Oil and the Ghost of Matthew Simmons Name: Course: College: Tutor: Date: Part A Title: Spot Oil Price: West Texas Intermediate Consumer Price Index for All Urban Consumers: All Items Series ID: OILPRICE CPIAUCSL Source: Dow Jones & Company U.S. Department of Labor: Bureau of Labor Statistics Release: Wall Street Journal Consumer Price Index Seasonal Adjustment: Not Applicable Seasonally Adjusted Frequency: Annual Annual Aggregation Method: Average Average Units: Dollars per Barrel Index 1982-84=100 DATE AVERAGE OIL PRICE CPI CPI 2005 DEFLACTOR AVERAGE OIL PRICE (REAL 2005) 1947 1.84 22.3 195.3 0.1 16.1 1948 2.57 24.0 195.3 0.1 20.9 1949 2.57 23.8 195.3 0.1 21.1 1950 2.57 24.1 195.3 0.1 20.9 1951 2.57 26.0 195.3 0.1 19.3 1952 2.57 26.6 195.3 0.1 18.9 1953 2.72 26.8 195.3 0.1 19.8 1954 2.82 26.9 195.3 0.1 20.5 1955 2.82 26.8 195.3 0.1 20.5 1956 2.82 27.2 195.3 0.1 20.3 1957 3.04 28.1 195.3 0.1 21.1 1958 3.06 28.9 195.3 0.1 20.7 1959 2.98 29.2 195.3 0.1 19.9 1960 2.97 29.6 195.3 0.2 19.6 1961 2.97 29.9 195.3 0.2 19.4 1962 2.97 30.3 195.3 0.2 19.2 1963 2.97 30.6 195.3 0.2 18.9 1964 2.95 31.0 195.3 0.2 18.5 1965 2.92 31.5 195.3 0.2 18.1 1966 2.94 32.5 195.3 0.2 17.7 1967 3.03 33.4 195.3 0.2 17.7 1968 3.07 34.8 195.3 0.2 17.2 1969 3.30 36.7 195.3 0.2 17.5 1970 3.35 38.8 195.3 0.2 16.8 1971 3.56 40.5 195.3 0.2 17.2 1972 3.56 41.8 195.3 0.2 16.6 1973 3.87 44.4 195.3 0.2 17.0 1974 10.37 49.3 195.3 0.3 41.1 1975 11.16 53.8 195.3 0.3 40.5 1976 12.65 56.9 195.3 0.3 43.4 1977 14.30 60.6 195.3 0.3 46.1 1978 14.85 65.2 195.3 0.3 44.4 1979 22.40 72.6 195.3 0.4 60.3 1980 37.38 82.4 195.3 0.4 88.6 1981 36.67 90.9 195.3 0.5 78.7 1982 33.64 96.5 195.3 0.5 68.0 1983 30.40 99.6 195.3 0.5 59.6 1984 29.28 103.9 195.3 0.5 55.0 1985 27.97 107.6 195.3 0.6 50.8 1986 15.04 109.7 195.3 0.6 26.8 1987 19.16 113.6 195.3 0.6 32.9 1988 15.96 118.3 195.3 0.6 26.3 1989 19.59 123.9 195.3 0.6 30.9 1990 24.49 130.7 195.3 0.7 36.6 1991 21.48 136.2 195.3 0.7 30.8 1992 20.56 140.3 195.3 0.7 28.6 1993 18.46 144.5 195.3 0.7 24.9 1994 17.19 148.2 195.3 0.8 22.6 1995 18.43 152.4 195.3 0.8 23.6 1996 22.15 156.9 195.3 0.8 27.6 1997 20.60 160.5 195.3 0.8 25.1 1998 14.39 163.0 195.3 0.8 17.2 1999 19.25 166.6 195.3 0.9 22.6 2000 30.30 172.2 195.3 0.9 34.4 2001 25.92 177.0 195.3 0.9 28.6 2002 26.10 179.9 195.3 0.9 28.3 2003 31.14 184.0 195.3 0.9 33.0 2004 41.44 188.9 195.3 1.0 42.8 2005 56.47 195.3 195.3 1.0 56.5 2006 66.10 201.6 195.3 1.0 64.0 2007 72.36 207.3 195.3 1.1 68.2 2008 99.57 215.3 195.3 1.1 90.3 2009 61.69 214.5 195.3 1.1 56.1 2010 79.43 218.1 195.3 1.1 71.1 Part B Introduction Before the famous bet between Simmons and Tierney, the two had never met. According to Simmons, the price of crude oil per barrel would triple. Simmons said; “We're going to look back at history and say $55 a barrel was cheap”. He pointed out that, this was because; the price of oil per barrel would soon hit the triple digits. On the other hand, Tierney did not support those claims and they had to fashion a bet. It’s from the bet that they two agreed that they would record the closing price of oil per barrel daily of the year 2010. In addition, they would calculate the averages each month and record them. The calculations would then be adjusted to the prices of 2005 for inflation. It was agreed that, in case the average ends up being more than $200 per barrel, Simmons would be the winner and if the average prices would be less than $200 per barrel, then Mr. Tierney would be the winner. A total sum of $15, 000 would be the price for the winner. Factors that Determine the Global Supply and Demand for Oil Demand and supply apparently affect the prices of commodities and specifically, the oil prices. Tierney (2010) pointed out that in 2008 for instance; the average price of oil per barrel was $99.57. This was an increase in price from $72.36 in 2007 due to increase in demand for commodities and also the demand for oil. Supply on the other hand influences oil prices in such that; with increase in supply, there is a resultant decrease in price. Tierney (2005) states that, in the 1970s the prices of oil quintupled and then the prices dropped, this was attributed to the fact there were new discoveries and technological advancements. These developments led to increase in supply and the consequent drop in prices. In the article ‘The Breaking Point’ by Peter Maass (2005), the author points out that, the high prices of oil were attributed to the shortages in the oil refinery and the increased demand. As he notes “thanks to record prices caused by refinery shortages and surging demand -- most notably in the United States and China -- which has strained the capacity of oil producers and especially Saudi Arabia, the largest exporter of all.” In other words, if the producer is no longer capacitated to produce oil due issues such as terrorism or social unrest, then there is a possibility that there will be no sufficient amount of oil to be sold. In that effect, the demand will be high and the supply will be low hence the prices will sky rocket. Apart from technological advancements and production, the other factor that influences supply and demand for oil is the gap that exists between the supply of oil and its demand. In the past years, the gap between oil supply and its demand has continued to get smaller. Currently, it is believed that the gap between the two elements is almost insignificant. Therefore, if there is a shortfall in supply even by a small margin, there would be detrimental effects on supply and demand and eventually, oil prices. In particular, if oil consumption increases in a manner that it surpasses its production, even if the margin is very small, then the price oil per barrel would be bound to increase to reach the level of triple digits. In the main, the gap between supply and demand affects prices in a great way. The consequences are numerous including the possibility of recession. This means, when demand is higher than supply, the prices of oil per barrel will be exorbitant and prices of products and transport would also be high and thus, the cost of living will be high. While this may cause economic strains and inconveniences in the short term, economic decline may one of the long term effects (Maass, 2005) Free market also affects the elasticity of demand and supply of oil and its prices. In an economy where there is free market, economists emphasize that; the availability of oil will be constant. This is because; when there is rise in oil prices, supply will increase and the increase will continue until a balance between demand and supply is achieved. However, when the government interferes with the free market e.g. through price controls or through rationing, then, the elasticity of demand and supply will be affected. This is attributed to the reason that; with regulation of prices, price elasticity demand will be destroyed especially in the short term whereas in the long term, there will be higher price elasticity demand (Mills, 2008). This type of market economy existing influences demand and supply of oil and it’s pricing both in the short term and in the long term. Arguments for the View that the real Oil Price will be Greater than $200 in 2020 Considering the factors that influence the supply and demand for oil as well as the other factors, there are various arguments that have been presented pointing out the changes in oil prices per barrel in the future. Like in the case of Simmons and Tierney, predictions about oil prices per barrel have been made. One of the arguments is that, ‘real oil price will be greater than $200 in 2020’. According to the opponents of this argument, the real oil price will not be $200 by the year 2020 mainly because the supply of oil is not limited. Maass (2005) asserts that, it is not easy to pin point the amount of oil that is available in the reservoirs and this makes it difficult to predict the future relationship between the supply and the demand for oil. The oil industry has a product that is hidden from the vicinity of the world and therefore, it is not easy to determine the forces of supply and demand especially in the future. Additionally, Naimi was quoted saying “I want to assure you here today that Saudi Arabia's reserves are plentiful, and we stand ready to increase output as the market dictates”. He continued to say that, with enhanced technological advancement, it will be possible to produce enough oil that would meet the increasing demands hence the prices of oil will not soar (Maass, 2005). Regardless of these assumptions, the fact is that, prices of a wide range of commodities have been increasing over time and thus, there is a high possibility that, by the year 2020, the real oil price will be $200 or more. One of the main reasons why this will be the case is the suggestion given by the concept of ‘Age of Scarcity’. The concept insinuates that, the general increase in global population causes stress and strain on natural resources and this triggers the increase in the prices of natural resources. That is, the increase in population necessitates the harvest more of the existing natural resources. Since the natural resources are limited and there are no technological advancements to recycle them, then, the resources will eventually be scarce. Considering the high population, the demand will be higher than the supply and therefore, the prices will be high (Tierney, 1990). In the case of oil prices, the same concept can be applied. With increase in global population, the demand for oil is increasing and due to the fact that oil is not being recycled, it will ultimately be scarce. The scarcity of oil and the high demand would trigger the increase in real oil price. For that reason, it is possible that the real oil price will be more than $200 by the year 2020. Some of the opponents of the argument may ask; ‘why are there still oil reserves even with the increase in population?’ an out right answer for that may not be available but the fact is, the quantity of oil reserves is not known (Maass, 2005), but certainly, prices cannot remain constant regardless of presence of oil reserves. Prices of numerous commodities keep increasing with time and this applies to natural resources such as oil because; the demand is naturally increased by increase in population. For example; in the 1970s, there was global oil crisis and population measurements indicated that; that was the period when population increase was also high (Tierney, 1990). Based on this, then, population increase shifts the demand for oil to the higher side and the consequent increase in oil prices. Apparently, increase in population leads to increase in oil prices and thus real oil prices will be more than $200 in 2020. Conclusively, it is evident that the prices of oil have been changing over time and the prices will continue to change. Although there are cases where oil prices decline with time, in several instances, the prices of oil increase. The increase in population affects the demand and supply of oil and consequently, the pricing. i.e. increase in population increases the demand for oil and when supply is constant, the prices are bound to soar. Therefore, there is a high possibility that real oil price will be higher than $200 in 2020. References Maass, P. (2005), Breaking Point, New York Times. August 21, 2005 Mills, R. M. (2008). The myth of the oil crisis: overcoming the challenges of depletion, geopolitics, and global warming. New York: Greenwood Publishing Group Tierney, J. (1990) Betting on the planet, New York Times. December 2, 1990 Tierney, J (2005) “The $ 10, 000 Question’, New York Times, August 23, 2005 Tierney, J (2010) Economic optimism? Yes, ill take the bet, New York Times December 27, 2010 Read More