Friday, 12 December 2014

Oil Supply and Demand - The Bauhaus Chair Model .

Oil. It's all supply and demand isn't it. Yes it is and of course when we talk about supply and demand economics 1.0.1. supply and demand curves appear in our brains. Neat crosses or gentle curves that intersect at the efficient price.

The oil market is currently over supplied, so theoretically prices will fall until there is no longer an over supply. Demand must go up or supply down.

But the supply side in oil has turned into a great big game of chicken. The mexican standoff, the staring game or perhaps more aptly a breath holding contest because as with a breath holding contests, the breath is held because though you are underwater you know that you are about to surface and so can take the sufferance in the short term... or until you run out of air. It doesn't help though when you are being held underwater by your competitors strong hand.

In oil it looks as though everyone is toughing out lower prices and there hasn't been a glimmer yet over who will cut production first to lower that supply. In the meantime  oversupply remains at a steady level even as prices are falling. Someone needs to crack and I wouldn't be surprised it will be at a time where lots of people crack, at which point the referee lifts the Saudi’s arm in the air, announces him victor and prices can rise again. To confuse things further supply can actually go up as  prices fall as extra oil is pumped by a producer to try to maintain overall income (volume x price).

On the other side oil demand does not necessarily rise with falling prices. Oil is already a social pariah so a fall in oil prices is most unlikely to see a surge in the  purchase of less fuel efficient engined cars, the building of new oil fired power stations to replace wind, solar or gas, or even an increase in the demand for plastic bags. Green issues effectively cap the lower end of the demand curve turning it flat. However there can be a temporary boost in demand as strategic reserves are boosted, but then this oil isn't being used, more rented.

So I have had a stab at drawing my own  supply and demand curve as I see it as prices are falling.  Far from being a simple X,  it is a rather nice designer Bauhaus chair with supply in blue and demand in orange. Yes the Price is on X axis in this case, otherwise it wouldn't look like a chair

We are now traversing gently left between the parallel tracks  only expecting to stop when someone finally cuts production.  As everyone knows, though I would be very surprised if anyone has ever expressed it like this before, that point is where the front of the seat meets the legs. 

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