Yes, the World Still Has Plenty of Oil, but. . .


"The global oil market is running on fumes, and no computer model can predict how far Mideast turmoil will spread."

Let's get this straight: At the moment, the U.S. has plenty of oil.

Let's get another thing straight: The price of oil is likely to keep rising because of market psychology and buyer panic about Mideast turmoil. And there's nothing you can do about it.

To understand why, start with the fact that the price of a barrel of oil has little connection to the cost of producing it.

The loss of Libya's oil would remove a small percentage of global supplies. In any case, Saudi Arabia reportedly has enough spare capacity to cover shortfalls.

But that's where the oil market's nightmare scenarios begin. With virtually no other spare capacity, the global oil market is running on fumes. And no computer model can predict whether—or how far—the turmoil will spread in the world's richest oil production region.

So why are prices skyrocketing?

For starters, there's a huge range of cost of oil production. Saudi Arabia can pull a barrel of oil out of the ground for just a few dollars; that same barrel extracted from tar sands in Alberta, Canada could cost $60. Further, not all crude is created equal, and not all refiners can handle heavier, sour grades of oil.

Finally, oil and gasoline prices depend heavily on just how much the last buyer is willing to pay. It's like the last-minute airline ticket buyer who pays a premium to sit next to a passenger who paid substantially less. As oil prices have become more volatile, more buyers have tried to lock in the cheap seats.

And it's hard to see how tapping into the U.S. Strategic Petroleum Reserves will help. Investors know the U.S. government is sitting on 727 barrels. And it still doesn't make them feel any more in control of the Mideast's future.

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