Monday, June 04, 2012

The Basics of Oil Supply and Demand

Many are wondering how increased oil production in nations like Iraq, Libya and Saudi Arabia is leading to lower crude oil globally and gas prices domestically, even though the situation is still quite dangerous in Iran, and whether war is imminent or not.

It's actually rather simple.

The world as a whole produces 84.7 million barrels of oil daily and consumes 82.7 million barrels per day, leaving around 2 million daily for reserves and other uses. This is why when civil war erupted in Libya, and NATO stepped in, crude oil skyrocketed because over 1.7 million barrels of production were disrupted...

Supply and demand, especially in regards to something as important as oil production, is a very simple yet delicate formula: reducing supply while maintaining current demand will always lead to higher prices.

Now, in regards to Iran this is even more true. The oil rich country produces over 4 million barrels per day, while they consume around 1.8 million daily, meaning that if total war occurs - even with Iran's consumption lowered dramatically, we will be several hundred thousand barrels short per day, which will lead to prices exploding.

However, with key nations increasing their daily production, including the United States to a small degree, we are coming close to the point where taking Iran out of the supply equation will no longer effect prices - thus fears over supply and demand issues during a potential conflict are abated, and supply is plentiful in a peaceful state.

Which is why we need American oil production to increase immediately. It not only will lead us to energy independence, but to greater security and protection from Iran's threats on the global oil markets.

What say you?

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