a tumblelog by nick chapman
dihard: The other night the World News cited a Moody’s Economy.com study that showed where the surge in the price of a barrel of oil actually comes from. Moody’s projects that if prices were based solely on supply and demand, a barrel of oil would cost only $75. $30 is tacked on due to speculators, that is oil futures traders. They’re long oil, buying futures contracts with speculations that prices will continue to rise. An additional $20 is caused by the weak dollar. Since crude oil is priced in dollars, as the dollar depreciates, higher prices are necessary to maintain a supply and demand balance. Since the dollar has depreciated about 10% in the last year, it buys about 10% less oil than it did a year ago. The final $10 is attributed to what is called a risk premium — that is the apprehension in the marketplace that deliveries of oil supplies may be disrupted. This happens for a number of geopolitical reasons such as strikes in Nigeria or deterioration in Iraq. Sellers, therefore, demand a premium on current deliveries or hoard oil for future sales. And there you have $135 barrels of oil. I thought it was interesting, though rather speculative itself.

dihard:

The other night the World News cited a Moody’s Economy.com study that showed where the surge in the price of a barrel of oil actually comes from. Moody’s projects that if prices were based solely on supply and demand, a barrel of oil would cost only $75.

$30 is tacked on due to speculators, that is oil futures traders. They’re long oil, buying futures contracts with speculations that prices will continue to rise.

An additional $20 is caused by the weak dollar. Since crude oil is priced in dollars, as the dollar depreciates, higher prices are necessary to maintain a supply and demand balance. Since the dollar has depreciated about 10% in the last year, it buys about 10% less oil than it did a year ago.

The final $10 is attributed to what is called a risk premium — that is the apprehension in the marketplace that deliveries of oil supplies may be disrupted. This happens for a number of geopolitical reasons such as strikes in Nigeria or deterioration in Iraq. Sellers, therefore, demand a premium on current deliveries or hoard oil for future sales.

And there you have $135 barrels of oil. I thought it was interesting, though rather speculative itself.