Question About Oil Trading

[harflimon]

So recently I was talking about the reasons for invading Iraq with someone and I said, The reason we went in was so that we could stop Saddam from pumping out so much oil and flooding the market which would then drive the prices down. Now this made perfect sense to me until said person decided to ask, How does oil pumped out of Iraq effect our Oil prices when we import only a fraction of it compared to other countries. For instance America actually imports most of its oil from Canada and Mexico. Iraq is #6 on the list.
http://www.eia.doe.gov/pub/oil_gas/petrole...ent/import.html

So I got to researching it and I couldn't come up with an answer. All I could do is point to the New York Mercantile exchange and the London Petroleum Exchange, for where they trade futures. So that's all good and dandy, but that got me questioning How do futures work? and for that matter what happens to oil that is taken out of the ground of the U.S. for instance the Alaskan oil. Do these Oil companies make hedges on futures contracts they create selling to their own refineres? And for that matter what about Venezula where oil is extremely cheap for the people. Does chavez just subsides them, because I don't think he nationilized his fields. Basically I'm extremely confused, because it's economics and it was made this way on purpose to confuse the masses. So basically I guess I'm asking if anyone has an article of some sort that can make sense of the Oil trading and how they screw us over. Because I'm still not completely sure how Russian oil is sold to say China and how that would effect oil prices between the U.S. and Canada. I hope I made sense with this post, it is rather early in the morning and I just spent two hours scouring the internet looking for something to explain this to me so I can give this person some kind of a coherent response, or at least point them in the right direction.

Thanks B)

[tsoldrin]

This is not my area of expertise but I'll see what I can do...

It's not the OIL per say... because, as you stated, the U.S. gets only a ... I can't say small, but only a partial percenatage of it's oil from the middle east. China gets FAR more. Also, the U.S. itself has tons of oil, as does Canada and Mexico... My understand of the situation is... and I could be wrong, I am no expert, that the U.S. had to go to war because Iraq was about to start trading it's oil in something other than U.S. Dollars and this itself would have bankrupted the dollar. Along these same lines is why the U.S. will attack Iran.. because it wants to trade oil in other currencies.

Bottom line is oil is traded in dollars and that is propping the dollar up and if it starts being traded in say... Euros, then the U.S. will face economic collapse.

Surely though, there are others more versed in this that can give a better explanation...

[Winston]

AFAIK the change was going to from US$ to Euro's.

[JohnDoe1984]

Truth is Iraq is a drop in the bucket when you look at the whole worlds oil production. Iraq never had the potential for flooding the worlds markets with cheap oil. That's not a reason we went to war. They simply don't have enough oil or production to do that. Our oil prices aren't set by America they're set by international exchanges. It's a combination of alot of factors and Iraq is a small variable.

Venezuala supplies itself with oil and the oil companies are gov owned same with Saudi. We import nearly all of it. So we are dependant on what the international price is and Venezuala is not. Also many euro nations and others heavily tax thier fuel. In some euro nations the price is 75% taxes.

Texas rep. Ron Paul had a great speach on euro's for oil called "the end of dollar hegmony" this is just part of it. Its much longer and worth the read.

http://thomas.loc.gov/home/r109query.html (this is a link for searching the congressional record [i]very cool)

Quote:In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case, that is the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates and graciously lend them back to us at low interest rates to finance our excessive consumption and our wars.

It sounds like a great deal for everyone, except the time will come when our dollars, due to their depreciation, will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ball game and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar and soaks up the huge number of new dollars generated each year. Last year alone, M3 increased by over $700 billion. The artificial demand for our dollar , along with our military might, places us in the unique position to ``rule'' the world without productive work or savings and without limits on consumer spending or deficits. The problem is it cannot last.

Price inflation is raising its ugly head, and the NASDAQ bubble, generated by easy money, has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and Federal spending is out of sight, with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world's rejection of the dollar . It is bound to come and create conditions worse than 1979-1980, which required 21 percent interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF will surely do everything conceivable to soak up the dollars in hope of restoring stability. Eventually, they will fail.

Most importantly, the dollar /oil relationship has to be maintained to keep the dollar as the preeminent currency. Any attack on this relationship will be forcefully challenged, as it already has been.

In November, 2000, Saddam Hussein demanded euros for his oil. His arrogance was a threat to the dollar ; his lack of any military might was never a threat. At the first Cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O'Neill, the major topic was how we could get rid of Saddam Hussein though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O'Neill.

It is now common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11 or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat-out misrepresentations of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling his oil in euros, yet many believe this was the reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory in Iraq, all Iraqi oil sales were carried out in dollars. The euro was immediately abandoned.

In 2001, Venezuela's ambassador to Russia spoke of Venezuela's switching to the euro for all their oil sales. Within a year, there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the euro toward replacing the dollar as the world's reserve currency were met with resistance, the sharp fall of the dollar against the euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

What controls oil prices? Check this out. It kind of needs it's own thread.

Quote:"Exxon reported another blowout quarter, earning a whopping 10.3 billion in just one quarter. Revenues rose 12 percent to 99 billion dollars -- marking the first time in history that a US company exceeded one billion dollars per day ...

WOW!! CHECK THIS OUT

Quote:Netherlands Amsterdam $6.48
Norway Oslo $6.27
Italy Milan $5.96
Denmark Copenhagen $5.93
Belgium Brussels $5.91
Sweden Stockholm $5.80
United Kingdom London $5.79
Germany Frankfurt $5.57
France Paris $5.54
Portugal Lisbon $5.35
Hungary Budapest $4.94
Luxembourg $4.82
Croatia Zagreb $4.81
Ireland Dublin $4.78
Switzerland Geneva $4.74
Spain Madrid $4.55
Japan Tokyo $4.24
Czech Republic Prague $4.19
Romania Bucharest $4.09
Andorra $4.08
Estonia Tallinn $3.62
Bulgaria Sofia $3.52
Brazil Brasilia $3.12
Cuba Havana $3.03
Taiwan Taipei $2.84
Lebanon Beirut $2.63
South Africa Johannesburg $2.62
Nicaragua Managua $2.61
Panama Panama City $2.19
Russia Moscow $2.10
Puerto Rico San Juan $1.74
Saudi Arabia Riyadh $0.91
Kuwait Kuwait City $0.78
Egypt Cairo $0.65
Nigeria Lagos $0.38
Venezuela Caracas $0.12

[harflimon]

Good information thanks for the posts. Quick follow up question: Why is gas so cheap in countries like Egypt and Nigeria? Is it because their government buys oil directly from the countries oil fields and doesn't let it go onto the international market? Couldn't we do that with our oil fields if our government didn't sell the drilling rights to private investors like BP in Prudhoe Bay?

[rockclimber]

I don't know much about egypt or nigeria but it could go something like this. The United States is sitting on 3.4 trillion (yes trillion) barrels of oil-shale. (1-trilllion barrels in Colorado alone) Since it costs more to produce, the cartel prefers Saudi Arabian crude since it's at the surface and easier and cheaper to produce. Canada has plenty of oil as well, over 3 trillion barrels, slightly less than the U.S. So why Canada is even selling us the oil is beyond me since they could self-sustain themselves for centuries. Venezuela has trillions of barrels as well and are selling it as low as 12 cents a gallon in it's own country. The point being is that oil is PLENTY available and that peak-oil is a myth. Refineries were shut down in the 70's to make it appear as if there is an "oil crisis". It's all about control and price fixing when it comes to the greedy and filthy oil cartel. Btw, Russia is loaded with oil and I Brazil is producing bio-diesel from oil bearing plants. The U.S. and Canada could always go that route, and country rich in soil and you would have a cleaner buring fuel. It will be forever and a day before the cartel even considers such a thing since they really could care less about the environment

My other thought is this: If Iraq, who like Saudia Arabia, has a substantial amount of the worlds crude surface oil (2nd largest) did open the floodgates it would have caused prices to go down and the oil companies couldn't have that. Iraq was going to go with a "basket" of currencies, removing the dollar from the dominant position.

[harflimon]

See Canada isn't the ones selling us the oil, it's whoever owns the land and is drilling the oil. The state of Alaska isn't pumping out oil in Prudhoe bay, BP is and they only have to give something like 1-5% of revenue to the state government for the drilling rights. Then BP sells the oil on the international markets, but what I want to know is how they set the prices in these international markets. I mean they can't actually have a place where they all get together and set a price and tell the world nothing about it. They have to at least try and hide it behind economics and intense algorigthms. That's the information I'm really after. How do the international oil prices get set from the two dollar hegemony exchanges (New York Mercantile and London Petro Exchange). I've looked for awhile but the best I could come up with is some crappy wikipedia article.

I know they can artificially influence the price and set it that way, but they have to have some sort of transparency for the public world. I'm pretty sure any commodities trader could buy you oil futures if you wanted to invest that way. I think it's called speculating when you do that.

Anyway good info, and peak-oil is definatly a huge scam. Did anyone see the huge oil reserves they found in the gulf of mexico? 3-15 billion barrel estimate. Makes you wonder why they didn't cover up that discovery even though it is just the tip of the iceberg.

http://www.iht.com/articles/2006/09/06/business/oil.php

[JohnDoe1984]

There's some good info on the pricing of oil in this article. From what I read it's basically whatever people are willing to pay for the stuff. Similar to the stock market. If the future looks bright for good supply you buy a bunch at a time for a good price. If the future is uncertain and fear of lack of supply is in the air the price goes up. Also there's only so much around and with India and China's appetite demand is way up. So naturally price will follow. Seems alot of the increase is due to refiners. Local refiners seem to be getting in on the game. This looks like where alot of the price fixing can be accomplished by limiting capacity. Of course they all take thier orders from the big oil corps.

One thing I'm wondering looking at the list I had in the last post. Why is Puerto Rico's gas so cheap? They're a US territory. They should have the same pricing as the US.

Quote:Big oil blames crude market for record gas prices, but there's more to it
By JEFF DONN Associated Press Writer
2006-07-31(AP) - While U.S. oil companies blame the global oil market for high gasoline prices, a close analysis of pricing suggests it's not so simple: The run-up at the pump also comes from domestic refining, which is largely controlled by Big Oil.

In consultation with several economists, The Associated Press examined pricing trends since 1999, which was the starting bell for the modern era of pricier gasoline. It found evidence that:

_The portion of gas prices tied to refining has ballooned all on its own, apart from oil.

_The suspicion of frustrated drivers is correct: After upward spikes, the price of gasoline drops back more slowly than the price of oil, and someone pockets the difference.

The country's average price for self-serve regular gas climbed to a record high at just over $3 a gallon in July, according to the Lundberg Survey research firm. The petroleum industry knows that many drivers are steamed about both its record prices and profits.

In a recent television commercial by the industry's American Petroleum Institute, a driver wonders "why world demand for crude oil determines what I pay at the pump." The industry wants Americans to know that the price of gas tracks the price of its chief ingredient, crude oil. Why? Oil prices are set on a world market, often beyond direct control of American petroleum companies.

The group has a point. Crude oil does account for just under half the price of gasoline, the government says. And oil prices are subject partly to supply decisions of foreign oil powers and stiff demand in Europe and Asia.

However, many Americans remain dubious, even contemptuous, of industry claims.

"It's a bunch of bull. It's just to cover their behinds," said Fernando Reas, of Hartford, Conn., who was saving on gas this summer by vacationing nearer home at a trailer park at Falmouth, Mass., on Cape Cod.

Consumers like Reas are right, at least, to suspect there's more to the story.

A big chunk of gas prices, almost a fifth, pays refiners who make gasoline from oil, and America's refineries have been hiking their prices, too.

Charges of refineries can be detected in what's known as their "margin", the difference between what they pay for crude oil and what they collect for the gas they refine. Service station costs and taxes add to the final retail price of gas.

In a competitive market, when raw material gets more expensive, margins typically shrink, economists say. Not so in the oil business these days. Refiners have somehow managed to fatten their margins through years of rising oil costs.

Since 1999, their average margin has jumped by 85 percent, reaching 43 cents for June, according to AP's analysis of daily data from the New York Mercantile Exchange. That margin increased by just 20 percent in the seven preceding years.

Rayola Dougher, who oversees market issues for the American Petroleum Institute, says today's margins are helping refiners bounce back from leaner times of the 1990s. "They're still as a sector struggling, but certainly the last few years have been looking good," she acknowledges.

Refining groups say they are doing their best to bolster supplies, which would ease price pressure. The industry has announced plans to expand domestic refining capacity by at least 8 percent in the next several years.

In fairness, the margin rise hasn't been all gravy for refiners. Refining costs have escalated from environmental mandates, such as special gas blends mandated in particular places. Wild price fluctuations have added risk, and thus financing cost, to business projects. Last summer's hurricanes also temporarily took out some operations.

But refining margins also reflect profit. Some economists and consumer advocates suspect that refiners have intentionally bottled up supply to buoy prices, margins and ultimately profits.

A 2002 congressional study found some evidence it happens, but that doesn't necessarily mean refiners huddled in a back room somewhere, hatching conspiracies. They don't need to. They can each simply decide to crimp output or hoard supply. Such margin goosing is a permissible bid "to maximize their profits," federal trade investigators said in a 2001 report.

"It's simple economics," says Severin Borenstein, director of the University of California Energy Institute. "They understand that putting more supply on the market drives the price down."

Bob Slaughter, president of the National Petrochemical and Refiners Association, blames high gas prices on high oil prices "which are frankly out of our control", not decisions by refiners to hold back on gas. But he also says, "There is no law that says you can make people in an industry invest and expand capacity."

Why wouldn't other refiners simply ramp up their own output and claim a bigger slice of unmet demand?

That has become harder to do, as big refiners have built up market muscle through mergers. The top five now control more than half of U.S. refining capacity, and the top 10 account for three-quarters, according to an AP review of federal data. Most are petroleum powerhouses like ConocoPhillips Co., Exxon Mobil Corp. and BP PLC, which influence prices with operations across the supply chain, from drilling to pumping gas into cars.

"Your refining business, because the market is more concentrated, you have far more control, is going to be more profitable," says Tyson Slocum, an energy expert with the consumer group Public Citizen.

There's another way to fatten your take: Once prices are up, you can keep them there.

An examination of gasoline prices relative to those of oil shows this tendency: Gas prices shoot up along with oil's, but sputter down slowly, lagging behind drops in crude prices.

The AP analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil _ suggesting that gas temporarily resisted downward shifts more strongly than oil.

Economists call the phenomenon "downward sticky" prices. "When costs go down, there's a margin there that people are happy to hold on to as long as they can," says economist Richard Gilbert at the University of California, Berkeley.

Slaughter, of the refining group, suggests that "downward sticky" prices are more illusion than reality, perhaps reflecting "a human tendency to notice higher prices quicker than it notices lower prices."

However, refining groups also suggest that gas stations may be offsetting losses they suffered earlier, when their margins were squeezed by the spiking cost of wholesale gas.

On the other hand, gas stations, backed by some market studies, say their skinny margins are hard to pad.

"It's tough, because people are yelling at you all the time, but we really don't make that much of a profit," said Laura Milner, manager of an independent Falmouth station selling regular unleaded Mobil that day for $3.24 a gallon.

Then who would pocket "downward sticky" profits? Economists suspect it's more likely the businesses that set wholesale prices charged to gas stations: the refiners

[mushty]

Sorry Fluffed up post :biggrin:

[mushty]

Quote:Truth is Iraq is a drop in the bucket when you look at the whole worlds oil production. Iraq never had the potential for flooding the worlds markets with cheap oil. That's not a reason we went to war. They simply don't have enough oil or production to do that. Our oil prices aren't set by America they're set by international exchanges. It's a combination of alot of factors and Iraq is a small variable.

You are Wrong there John, 75% of the world remaining Oil and Gas is located in the Middle East, and over the next few decades the US will Gradually gain control of these resources Whatever it takes to do so,
Iran is next on their list. The ONLY reason the US went to war was for Oil, Saddam has been in power for many years and you country funded most of his wars, Although Saddam was a Dictator at the end of the day he was used as a Scapegoat for a War.
I appreciate it may be hard to accept as you are an American but its the truth, your economy has been in decline over the past decade and Oil is its driving force.
As i have said before, Control Most of the worlds oil and you have the power to bring pretty much everything to a grinding Halt!

[Moriani]

Quote:So recently I was talking about the reasons for invading Iraq with someone and I said, The reason we went in was so that we could stop Saddam from pumping out so much oil and flooding the market which would then drive the prices down. Now this made perfect sense to me until said person decided to ask, How does oil pumped out of Iraq effect our Oil prices when we import only a fraction of it compared to other countries. For instance America actually imports most of its oil from Canada and Mexico.

That was not the reason the US invaded.

The US invaded Iraq to convert the Euro burse back to dollars and to ensure that all future reserves were contolled by private enterprises, instead of being nationalized, and to a lesser extent, to keep foreign competitors out of Iraq so US companies coud have a shot at the contracts, and so that the US has a staging area for future military operations in MENA.

Even if that were not true, Iraq was barely able to pump oil, so there's no way Iraq was "flooding the market."

The infrastructure, ie the well heads, pipelines and processing facilities, had been poorly maintained, damaged or otherwise were in dire need of repair and barely working.

Anyway, to answer your question, oil prices are determined by world supply and demand, not regional or local supply and demand, like say i-Pods or something like that.

Oil prices would be the same even if the US imported zero oil.

Quote:So I got to researching it and I couldn't come up with an answer. All I could do is point to the New York Mercantile exchange and the London Petroleum Exchange, for where they trade futures. So that's all good and dandy, but that got me questioning How do futures work?

Futures are fixed price contracts based on a guesstimate of what prices will be in the future.

Contracts are usually 6 months to 5 years, depending on the commodity traded. Volatile markets have shorter contracts (like oil).

Remember the movie with Eddie Murphy and Dan Akroyd where they corner the market on frozen orange juice? That was futures trading. They were buying and selling the future price of frozen orange juice based on the future supply and demand of oranges. The crop report on oranges was essential to know whether there was a large supply of oranges (low price frozen orange juice) or if oranges would be in short supply (high price of frozen orange juice).

Quote:and for that matter what happens to oil that is taken out of the ground of the U.S. for instance the Alaskan oil. Do these Oil companies make hedges on futures contracts they create selling to their own refineres? And for that matter what about Venezula where oil is extremely cheap for the people. Does chavez just subsides them, because I don't think he nationilized his fields. Basically I'm extremely confused, because it's economics and it was made this way on purpose to confuse the masses. So basically I guess I'm asking if anyone has an article of some sort that can make sense of the Oil trading and how they screw us over. Because I'm still not completely sure how Russian oil is sold to say China and how that would effect oil prices between the U.S. and Canada. I hope I made sense with this post, it is rather early in the morning and I just spent two hours scouring the internet looking for something to explain this to me so I can give this person some kind of a coherent response, or at least point them in the right direction.

Thanks B)

Yes, Chavez does subsidize oil for Venezuelans.

One thing you need to understand is that oil is not gasoline. The price of oil does not always impact the price of gasoline. You can have low oil prices but still have high gasoline prices.

The price of gasoline in the US is based on supply and demand and is determined in part by refining capacity. The US has not built a new refinery in some 30 years or so and the US is way beyond capacity.

Simply put, US refineries cannot refine oil fast enough or in large enough quantities to meet the demand of consumers. As the population increases and the number of drivers and vehicles grow, it's only going to get worse.

There are also different grades of crude oil. Each grade yields a different quantity of gasoline. So light sweet crude from Saudi Arabia yields 19 gallons of gasoline per barrel, something from Russia, Romania or Nigeria is a lesser grade of crude and only yields 12 to 15 gallons of gasoline, and that reduces the supply of gasoline available which increases the price.

The US has only a handful of refineries that can process lesser grades of crude. Valero in St Charles Louisiana is an independent refinery that can process lower grades of crude oil. BP has recently modified one of its refineries to handle lower grades.

When looking at oil prices, you're usually looking at light sweet crude. West Texas Intermediate Crude usually sells for less than light sweet crude. The syrupy stuff that comes from other countries sells for even less, but again, it's harder to refine and doesn't yield a lot of gasoline.

[WeThePeople]

Quote:Because I'm still not completely sure how Russian oil is sold to say China and how that would effect oil prices between the U.S. and Canada.

I just posted a new thread titled Chinese President Arrives in Russia for Energy Talks that might (or might not) help explain it.

[StingingNettle]

This will defenitely explain it: http://www.dailyreckoning.com/Issues/2007/DR031907.html

"Sean Brodrick at Money and Markets writes that it appears Peak Oil has affected Mexico, as, "In December 2005, Mexico sent the U.S. 1.7 million barrels of oil per day (bpd). This past December, Mexico only exported 1.2 million bpd to the U.S."

He asks, "Why is Mexico sending less oil?" For some reason, I thought that he was really asking a question, so I leap up and say, "Because they are selling it to China and India and everywhere else, but they don't need the money, anyway, because my appetite for tacos is off the charts here lately, and they are making plenty of money that way! And speaking of tacos, that sounds good! Let's break for lunch! Your turn to buy! Let's go! Hup! Hup! Move it! Let's go, go, go!"

This was, as I interpret the pained and angry look on his face, the wrong answer, probably because it is only 9:30 in the morning. He pointedly ignores me and explains, instead, "Because it's producing less oil. Total oil output fell to just below 3 million bpd in December 2006. That's down from nearly 3.4 million barrels at the start of the year, and Mexico's lowest rate of oil output in seven years."

This is bad news for Mexico because "Mexico relies on oil exports for about 40% of its revenue." Notice the complete lack of exclamation points in those four previous sentences. When it is reported in the Mexican newspapers, you can bet your burrito supremo that headlines will have PLENTY of exclamation points all over the damned place. For example (showing off my impressive command of Spanish), "Ustamos Mucho Grande Freaking Doomed, Just Exacta Mundo Para El Mogambo Habla!!!" which got three exclamation marks, since they understand the true significance of, "Mexico relies on oil exports for about 40% of its revenue"!!!"

[Moriani]

Quote:Output from 54 of the 65 largest oil-producing countries in the world is in decline.

The biggest problem people have is understanding very simple concepts. An oil field with 100 Million barrels does not and will not necessarily produce 100 Million barrels of oil.

It may only produce 25 Million barrels of oil then have to be shut down.

Is it all the same grade of oil, or is it two or more grades of oil? Sweet crude is cheap to refine and produces 19 gallons of gasoline per barrel. Heavy crude is expensive to refine, which increases the cost of gasoline, and it only produces 12 gallons of gasoline per barrel, which reduces the overall supply which can cause prices to rise if demand is high.

At some point, water/salt water has to be injected into the field to maintain pump production at high levels. But that also means that because water/salt water is injected, it gets pumped out with the oil. At first it isn't much, just 1% water and 99% oil, but the ratio of water to oil keeps increasing. As it does, production decreases. Eventually each barrel pumped out of the field is 50% oil and 50% water/salt water.

Separating the water from the oil increases the cost of production, which drives the price of a barrel of oil up. At some point, I don't know when, the ratio of water to oil makes it unprofitable to operate that particular well, and it's shut down. Drilling new wells won't help because it takes 5-6 years to recoup the costs, and it wouldn't matter if the well was pumping enough water to make it unprofitable.

Peak oil is expected to occur between now and 2010. At the end of this month, the data from last year should be available. The data on world production and world demand will be known for 2006, and a better date for peak will be available.

Peak oil is currently defined as a 2% reduction in production coupled with a 2% increase in world demand.

The estimated price as of 2005 was $160 per barrel. The ratio in the US is about 21:1 to that would make a gallon of gas about $7.60 per gallon.

This won't happen at once, it'll be a gradual increase over 6-12 months. Oil prices are inelastic in the short term, but elastic in the long term. So over a period of a year to 18, as people start reducing consumption, prices will drop down to about $120 per barrel, but gasoline prices will still be over $5/gallon in the US.

[StingingNettle]

I've seen you have taken an economics class or two:)