Ralf, in 2000 oil was selling for $15 a barrel. Do you really believe the entire world oil economy has changed that much in eight years? I don’t. I also remember that there were similar claims that it had so changed back in the seventies during the first oil shock. I didn’t buy it then, either.

Ralf, your first post seems to indicate that you think light sweet crude should be cheaper than sour, and yet your later cite says this:

he relative value of crude oils is determined by two main factors: location and quality. In the case of Brent and WTI, the crude produced is light and sweet (low sulfur). Both grades are produced in or near key oil consuming and refining centers. The twin advantage of quality and location mean that these crude oils command relatively high prices in the market.

Second, while interesting, your cite does little to address my contention that the overall market has not changed that much - or at least enough to justify a 1000% increase in price per barrel - in eight years. To do that, it would have to give us some comparisons between oil grade mix and demand in 2000 versus 2008. And it doesn’t.

Add Saudi Arabia to that “sour” mix, nemo. And that is my point. Ralf claims that a change in the mix of light/sweet to sour available in the global markets, coupled with global demand, is responsible for the 1000% increase in the benchmark price over the past eight years.

I’m not buying it. Sorry.

I should also add that the Chinese have signed a lot of long-term contracts at a set price. If the US wanted to screw their economy, driving the cost/bbl below the contract price would work pretty well. Since we are so deep in bed with them I don’t see this happening. I expect the price/bbl to stay near or above the Chinese contracts.

If US energy policy has demonstrated anything, Jack, it is that we have almost no effect on global oil prices. And if China has signed a bunch of long-term contracts at 100/bbl, and the price drops to 50/bbl, they’ll simply unilaterally abrogate those contracts. Although I’d bet you big bucks there are fail-safe protections in those contracts that protect them in the event of a major collapse in global oil prices. They’d be nuts if there weren’t.

Bill,

it depends on the time-frame, for I wasn’t referring to the present and immediate future but to the next decade or so and beyond, for I am mainly worried about what may happen afterward.

I hinted at it with: We don’t know how much of the recently discovered oil is of either quality yet. Once we know, those data will have a huge impact on the long-term market price of oil, ignoring the effects of speculation but I really should have been more specific than that, sorry.

Light, sweet crude is easier to refine, so there is higher demand, whereas heavy, sour crude is so expensive to refine and so little refining capacity for that kind of oil isavailable that there is effectively no demand for it right now (that was what I was getting at in my remark about Iran and Venezuela). Trouble is, once there is so little of the light, sweet crude left that you can’t turn heavy, sour crude down, we’ll have to accept the higher cost that goes along with refining it.

For now there is this (from May of this year):

Iran Doubles Oil Stored in Tankers, Bolstering Rates:

May 2 (Bloomberg) — Iran, OPEC’s second-largest oil producer, more than doubled the amount stored in tankers idling in the Persian Gulf, sending ship prices higher as demand for some of its crude fell, people familiar with the situation said.

…

While oil rose to a record $119.93 a barrel on April 28, Iran has a glut of its sulfur-rich crude as refineries that can process the fuel shut down for maintenance. The discount on Iranian Heavy crude compared with Oman and Dubai petroleum has more than doubled since the start of the year, according to data compiled by Bloomberg.

“There’s not much demand for heavier crudes such as those from Iran,'’ said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “It’s the peak of the refinery maintenance season in Asia, and Iran also sells oil to Europe and the Mediterranean, where some refineries are having turnarounds,'’ or seasonal shutdowns for repairs, he said.

But once the lower quality crudes begin making up a larger and larger share of the available oil, things will look differently. (Looking at the bright side, Iran doesn’t actually have an oil weapon as long as the price of oil keeps below 160 or so Dollars a barrel, at least).

I still say that part of the change is a monetary component.

Hypothetically, supply/demand is in balance @ 1000 bbls per day and there was 1000 US$ in the money supply. Double the amount of US$ in the money supply to $2000 and what would happen to the price per barrel in US$ absent any change in the supply/demand situation?

There has been large increases in the supply of US$ over the last ten years (first the Asian crisis, then Y2K, then dot.com, then Enron/Worldcom, now the housing bubble). Not only that but expectations of still more robust money supply growth in the future has taken hold.

Given that, oil has run up well past it’s rational point because of emotional factors, or what “experts” call Greed. I think 90-100/bbl may be the floor. But ‘experts” have noted that when Fear takes over from Greed the correction often goes further the other way than would be expected. We’ll see.