To: AndyJackson
The price of oil will always be well above the marginal cost of production for most producers. The marginal cost of production is only a factor for the highest cost producers. If the price goes below their marginal costs, they will stop producing — but, there will still be low-cost producers making more than the marginal cost of their production. Those low cost producers are mostly in the mid east — or in such exotic places as Texas. They sell at the highest price the market will bear, rather than their marginal cost of production — because they would have to be insane to do otherwise.
To: USFRIENDINVICTORIA
They sell at the highest price the market will bear, rather than their marginal cost of productionAnd when supply is relatively inelastic, it is price that sets consumption. This is the classic theory of rents (read Ricardo on the subject). But when demand is also inelastic and there are externalities (i.e. you will stop eating out in order to pay for gas to get to work), then the price above the marginal cost of production is arbitrary, and speculators can, by taking a small quantity off the market, drive prices up for everyone. Long side only speculators, in effect, by accumulating ever larger futures positions are paying producers to keep their oil in the ground.
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