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Supply and Demand question - worldwide car population

 
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Supply and Demand question - worldwide car population Can't Post
It seems like every time the price of a barrel of oil rises that someone on TV or in the news mentions the "increased demand" from Asia (mainly China and India) One guy even noted that with a population of 1 billion in India that they could easily have 100 million drivers basically equal to the US. But this logic seems to be very flawed to me. How would a country like India be able to afford gas for 100 million drivers if the price of oil continues to rise? Here in the US we are sweating over $4 a gallon gas with salaries that are much higher than in China or India. So if we are sweating wouldn't that make gas unfordable in China and India?

I understand that China subsidizes the cost of gas (and therefore loses billions of dollars) and perhaps India does too and that could account for the demand to still increase in those countries. I also understand that a falling dollar tends to increase the price of oil. But at some point it seems that subsidized gas in China (and perhaps India) will become way too expensive for those governments to keep up and still grow. (If growth outpaced the losses then wouldn't every country subsidize gas?)

Which leads me to my question (sorry about the long forward)

In your opinion, is the price of oil a huge bubble that is going to burst and if so what would be the repercussions of a burst oil bubble?

(This post was edited by econmod on Mar 7, 2008, 10:40 AM)
Losx
New User

Mar 5, 2008, 3:10 PM

Post #1 of 15 (2288 views)

Re: [Losx] Supply and Demand question - worldwide car population [In reply to] Can't Post
Well you're making one assumption that isn't true--that India drives like the US. America has the most car drivers (owners) in the world. US accounts for about 25% of the world car population. Plus, America has space, people have gas guzzlers, and they drive drive drive (long distnaces too). The rest of the world doesn't live like this. That contributes to the affordability in other countries, but really, in India the vast majority DO NOT drive.

BUt you're right, people are developing (India and China) and regardless of cheap and efficient cars overseas, more drivers = more demand for oil. So the demand for oil is increasing exponentially--it's a problem, especially for the #1 oil consumer the US. They're very concerned, however, with 100/barrel oil, we're not going to run out of it anytime soon. Best thing to do is to stop buying SUVs :P

econmod
Broker / Moderator

Mar 7, 2008, 10:46 AM

Post #2 of 15 (2259 views)

Re: [econmod] Supply and Demand question - worldwide car population [In reply to] Can't Post
Thanks for the response, but I think you missed the point of my post.

First I agree that India and China do not drive as much as the US.

My point is that if the price of oil continues to stay so high it would be IMPOSSIBLE for them to EVER drive as much as the US because the average American can afford the higher gas price a lot more than the average Chinese or Indian driver.

However if you read the news or watch CNBC, any time the price of oil is discussed they continue to bring up the "Increased Demand" from India and China. In fact I just read an article mentioning that by 2050 India and China will have 1.2 billion drivers. How could that be possible if the price of oil is so high and continues to rise? How would those 1.2 billion Chinese and Indian drivers ever be able to afford the gas?

Basically what I am trying to understand is how one of the main arguments for higher oil price, namely increased demand in developing countries, can be reconciled with the fact that as prices increase, demand decreases. It seems to me that speculating on future demand on something like oil is counter-intuitive. Lots of oil is needed to grow an economy and to supply a billion drivers with gas, but if oil is too expensive then the economies wont grow as fast and the billion drivers will never come to be because they wouldn't be able to afford the gas.

I believe people are speculating about future demand increases thereby pushing the price of oil up, but in fact the higher price of oil makes it doubtful that the increased demand will ever come to be.

Eventually this speculative bubble will have to burst in my opinion. Either the demand from developing countries will collapse due to the high price or, as OPEC is claiming, it will be determined that the supply of oil far exceeds the demand and that will also cause the price to fall.

The only other possibility is that China and India can actually afford such high energy costs more than the US can which seems unlikely given that the US is still the richest country in the world.

Losx
New User

Mar 7, 2008, 3:29 PM

Post #3 of 15 (2256 views)

Re: [Losx] Supply and Demand question - worldwide car population [In reply to] Can't Post
There are a few assumption you're making that I think may help clarify your argument/observations.


1. US drive way more, as in the population has access to cars because they can afford it.

2. India and China drive way less per capita, however, that doesn't mean there isn't less money, lots of money and people who CAN afford to drive regardless of oil price

3. Let's not assume gas is the same price across the board (As you mentioned earlier).

4. The consumption of oil is not just cars. I don't know the numbers but it is manufacturing and other uses that consume oil. Guess who purchases the items that are produced using more expensive oil? YOU! Ameriacns are the primary importers of Chinese goods. So when oil goes up who pays? Clearly Americans will pay more in goods because it costs more to produce. However, you will continue to import the Chinese goods because they remain cheaper.

5. The people in India and China who didn't drive before won't be driving now given higher prices so they're probably is a loss of drivers on the road as gas prices increase.

econmod
Broker / Moderator

Mar 9, 2008, 5:42 PM

Post #4 of 15 (2247 views)

Re: [econmod] Supply and Demand question - worldwide car population [In reply to] Can't Post
Thanks for the response:

1) US Drives way more - No doubt, I dont think that is in question although the increased fuel prices is already affecting US consumers in terms of amount of driving and types of cars being bought. If anything as long as oil prices remain this high the US demand will definitely drop.

2) India/China drive less per capita but lots of people there can afford to drive - I am sure that is the case but oil price speculation I have been referring to is based on hundreds of millions of NEW drivers in those countries. That seems unlikely as long as the standard of living in those countries remains to a large degree much lower than US and Europe

3) Gas prices are not the same across the board - Agreed. But if China and India are subsidizing gas they are losing billions of dollars. It seems unlikely that they could keep that up.

4) Industrial consumption vs. Fuel - Good point. If industrial consumption in a large factor it could support increased oil prices but as I mentioned before, the "experts" seem to always point to hundreds of millions of future drivers in China and India to support the reason for high oil prices. They may be full of it or trying to purposely drive up the price of oil but their logic is faulty imo.

5) New drivers in China/India unlikely with price of oil/fuel higher - Agreed. This is exactly my point.

So that brings us to the big question:

Is the record high price of oil a bubble?

As you can see from my posts I do believe this mainly because one of the main lines of reasoning for higher oil prices is presumed increased FUTURE demand in China & India for fuel and that future demand is very unlikely to ever appear given the record high oil prices.

It seems to me that oil prices should be based on current demand not future demand since the very act of speculating future demand actually affects it.(It seems like this would be the case for most commodities such as corn, wheat, etc... but I havent really thought about those.)

Any thoughts on whether the price of oil is a bubble? (And by bubble I mean will it "pop" and come crashing down suddenly such as the internet bubbles, the housing bubble, etc...)

Losx
New User

Mar 13, 2008, 3:00 PM

Post #5 of 15 (2182 views)

worldwide oil prices on the bubble? [In reply to] Can't Post
Well to answer your question directly (Rather dialogue, not answer it) I would say no, there is no current bubble. The reason I suggest this is because oil is a scarce resource. Until we innovate past oil (And find a cheaper source of energy) then we will always have demand for oil (it won't just disappear tomorrow for no reason, one of the results of a bubble burst).

econmod
Broker / Moderator

Mar 16, 2008, 7:04 PM

Post #6 of 15 (2135 views)

Re: [econmod] worldwide oil prices on the bubble? [In reply to] Can't Post
From my point of view, oil prices is higher just only because US dolloar is depreciating.
US governement recently printed and is still printing lots of US dollars to save US bad economy because :
1.Bush wasted lots of TAX money on war without geting any benefit
2.Bush did not ever focus on economy
3. Bubbled US economy before

jackyl
New User

Mar 30, 2008, 1:12 PM

Post #7 of 15 (2008 views)

Re: [jackyl] worldwide oil prices on the bubble? [In reply to] Can't Post
Oil prices is becoming higher simply because US dollar is becoming cheaper!!

jackyl
New User

Mar 30, 2008, 1:17 PM

Post #8 of 15 (2007 views)

Re: [jackyl] worldwide oil prices on the bubble? [In reply to] Can't Post
I wouldn't say the entire reason why world oil prices have increase are a result of the US dollar depreciation, although that does play into the short term price fluctuation.

http://biz.yahoo.com/ap/080401/oil_prices.html?.v=9

The reality is demand increases as China and India AND America wnat more and more and more oil but the supply remains about the same.

Join the Economics Community!

Barry
Mr. Do It All


Apr 1, 2008, 12:23 PM

Post #9 of 15 (1980 views)

Re: [Barry] worldwide oil prices on the bubble? [In reply to] Can't Post
1. The price of oil is manipulated. As in most markets, the idea of a "free market" is a myth. I could claim that big oil and OPEC sleep in the same bed but that would be accusing them of incest.

2. The supply is limited, as is everything else, but oil is being discovered at a faster pace than we are using it. It will be kept in the ground. Many estimates say that there is as much oil under Iraqi sand as there is in Saudi Arabia.

3. Frankly I hope China and India don't go down the same path we took. For their sakes I hope they invest heavily in public transportation. I don't feel deprived when someone else does the driving. I kinda like it.

Zan
Teller

Apr 12, 2008, 12:25 AM

Post #10 of 15 (1814 views)

Re: [Zan] worldwide oil prices on the bubble? [In reply to] Can't Post
In Reply To
1. The price of oil is manipulated. As in most markets, the idea of a "free market" is a myth. I could claim that big oil and OPEC sleep in the same bed but that would be accusing them of incest.

2. The supply is limited, as is everything else, but oil is being discovered at a faster pace than we are using it. It will be kept in the ground. Many estimates say that there is as much oil under Iraqi sand as there is in Saudi Arabia.

3. Frankly I hope China and India don't go down the same path we took. For their sakes I hope they invest heavily in public transportation. I don't feel deprived when someone else does the driving. I kinda like it.

1. The price of oil is set an open market called the NYMEX. All grades of crude oil are set either higher or lower than the NYMEX price in relation to the energy content and "sweetness" (lack of contaminants) of the oil While some big hedge funds are long oil because they think the price is going up, other are short because they think the price is going down. The net result is only a slightly higher oil price.

2. Oil is not being discovered at a faster pace than we're using it. That hasn't been the case since the early 1980s. Oil discoveries are down substantially from their all time peak in the 1960s, that means oil production must eventually peak and start to decline, very soon

3. China is going exactly down the same path we took. Personal transportation is highly desired there, like it is here. So too in India. The Indian company Tata recently released the "Nano" for $2500. People in Asia are snapping them up.

It happens all the time. Increased demand against a static supply means higher and higher prices. The only way the bubble might burst is if people stop using oil. There's isn't a cheaper form of energy out there.

joewp
Teller

Apr 13, 2008, 12:47 AM

Post #11 of 15 (1805 views)

Re: [Losx] Supply and Demand question - worldwide car population [In reply to] Can't Post
I don't think it's a bubble though, but nice thought anyway.

Actually, we might be really heading for the real oil and energy crisis. This isn't a bubble but a real sign of slowing global production of oil.

We've got pipe explosion last year at Endbridge (or was it Enbridge?), hurtling the prices near 100. Now, it's pushed through and counting.

Who knows if India or China will never arrive at the case of USA today? The demand of cars may increase or decrease anyhow.

And how about those oil power plants? Surely new inventions and modifications are likely to consume more energy rates. (or that is, usage frequency increases - especially on airconditioners, not forgetting global warming when people need the cool).

The only way to say price spikes are but a bubble on supply and demand - is that if we are able to tap a new, common, and easy to use energy source - this should quell oil demand on most countries.

And better - if governments diversify on tapping energy sources, we wouldn't see the price of nat-gas rise as quick as oil and petroleum rose sharply.

And best of all - car can be backed by nat-gas, solar and biomass energies. No need to worry if India will have a hundred million drivers.
12895_econ
New User

Apr 17, 2008, 8:46 AM

Post #12 of 15 (1739 views)

Re: [Zan] worldwide oil prices on the bubble? [In reply to] Can't Post
Well there might be a chance that the oil markets are being manipulated by OPEC and the United States.
I believe that US has some hidden oil reserves - hidden for the purpose of taking over other nations economically defunct by oil scarcity.

It might be a worth a speculation that OPEC is hiding oil by its power.
And China is a country - mostly of bikes. They are unlikely to be an oil customer as large as US.

But it is unlikely that there will be much oil under Iraqi sand to back global demand.
More fossil fuels are coal than oil.

So those stuff under Iraqi sand are most likely more coal than oil.
12895_econ
New User

Apr 17, 2008, 8:57 AM

Post #13 of 15 (1738 views)

Re: [joewp] worldwide oil prices on the bubble? [In reply to] Can't Post
In Reply To
In Reply To
1. The price of oil is manipulated. As in most markets, the idea of a "free market" is a myth. I could claim that big oil and OPEC sleep in the same bed but that would be accusing them of incest.

2. The supply is limited, as is everything else, but oil is being discovered at a faster pace than we are using it. It will be kept in the ground. Many estimates say that there is as much oil under Iraqi sand as there is in Saudi Arabia.

3. Frankly I hope China and India don't go down the same path we took. For their sakes I hope they invest heavily in public transportation. I don't feel deprived when someone else does the driving. I kinda like it.


1. The price of oil is set an open market called the NYMEX. All grades of crude oil are set either higher or lower than the NYMEX price in relation to the energy content and "sweetness" (lack of contaminants) of the oil While some big hedge funds are long oil because they think the price is going up, other are short because they think the price is going down. The net result is only a slightly higher oil price.

2. Oil is not being discovered at a faster pace than we're using it. That hasn't been the case since the early 1980s. Oil discoveries are down substantially from their all time peak in the 1960s, that means oil production must eventually peak and start to decline, very soon

3. China is going exactly down the same path we took. Personal transportation is highly desired there, like it is here. So too in India. The Indian company Tata recently released the "Nano" for $2500. People in Asia are snapping them up.

It happens all the time. Increased demand against a static supply means higher and higher prices. The only way the bubble might burst is if people stop using oil. There's isn't a cheaper form of energy out there.


Regarding your comment about discovery. We're actually always expanding reserve numbers because a) we discover more, b) initial estimates turn out to be underestiamtes, c) technology improves and we lift more oil from existing wells. So really there isn't THAT big of a supply problem, just oil companies refusal to lift faster and not enough refineries.

econmod
Broker / Moderator

Apr 20, 2008, 5:41 PM

Post #14 of 15 (1713 views)

Re: [econmod] worldwide oil prices on the bubble? [In reply to] Can't Post
Well, no we aren't discovering more. Discoveries peaked in the 1960s and have been dropping almost steadily since. Here's a chart from the IHS, an opponent of the peak oil theory, so they're very unbiased.


Initial estimates usually turn out to be way overestimates to attract funding. The recent hype over the Bakken field being a resource of 200 billion barrels was recently cut down to size by a USGS survey that pegged the recoverable resource at under 4 billion barrels (6 months of US use, less than 2 months world use). Lately, new discoveries have major question if they'll ever be profitable due to high expense, like the Jack field in the Gulf of Mexico, and it's now 2 1/2 years that we're waiting for the Thunderhorse platform to be repaired and returned to the Gulf.

Lifting more oil from existing wells is by definition at a lower rate of extraction than when natural pressure forced the oil out, and it's like scraping the last bits of ice cream from the container, it shows you're really desperate. And there are plenty of refineries for the oil available. If there was oil going unrefined, the oil price would plummet. US refineries were operating at 81.4% of capacity last week, there's no shortage of refining capacity

It's really economics 101. Increasing demand against static supply must make for higher prices. It's the market's rationing system. What economics 101 doesn't teach is that resource deplete, and growth must stop. They don't teach it because it invalidates their entire subject matter.

joewp
Teller

Apr 20, 2008, 7:56 PM

Post #15 of 15 (1712 views)

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