Price vs Cost (vs Value)
Summary: Unless you happen to work for an oil company or an oil brokerage, you probably only think about the price of oil while you are fueling up at a gas station, watching the meter spin. One barrel of crude oil can be distilled into 42 gallons of various products — gasoline, heating oil, diesel, jet fuel, motor oil, road tar and a few other, less useful things, such as naphtha. After factoring in refining costs, transportation costs and taxes, oil at $40/barrel translates into gasoline at about $1.50 per gallon. Oil at $80 equates to about $3 per gallon. Oil at $147, which is where it peaked in 2008, is over $5 per gallon. In recent years, a barrel of oil has gone from $30 to $150, back to $30 again, up to $120, down to $27, and, as of this writing, had been at around $50 until the 2020 Covid 19 pandemic when it briefly dropped to -$37. These are prices set by markets of buyers and sellers, and markets bounce up and down because they’re based not just on “supply and demand,” but the belief of buyers and sellers of where “supply and demand” will be in the future. These prices do not directly reflect the costs of extracting and producing oil. As you’ve seen in previous sections, there are two kinds of costs to this extraction and production: the financial (money) cost, and the energy cost. The financial cost is “whatever the buyers, and society, believe they can afford”, while the energy cost embodies absolute thresholds on just how worthwhile it is to go after any particular source of oil. So if one doesn’t understand that oil has an energy cost, but thinks it only has a financial cost, it might seem that every atom of oil within the planet could be extracted just by printing as much money as necessary. (That’s the “state of the art” of the economics which is now guiding energy decisions for this nation, by the way.)
Focusing on “financial cost of extracting and refining” oil products versus
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