Voodoo Economics

Now, I understand that the Supply-Price relationship isn’t linear, but this is getting out of hand.

ANCHORAGE, Alaska (AP) – In a sudden blow to the nation’s oil supply, half the production on Alaska’s North Slope was being shut down Sunday after BP Exploration Alaska, Inc. discovered severe corrosion in a Prudhoe Bay oil transit line.

Once the field is shut down, in a process expected to take days, BP said oil production will be reduced by 400,000 barrels a day. That’s close to 8 percent of U.S. oil production as of May 2006 or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.

A 400,000-barrel per day reduction in output would have a major impact on oil prices, said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo.

Oil prices could increase by as much as $10 per barrel given the current environment,” Emori said. “But we can’t really say for sure how big an effect this is going to have until we have more exact figures about how much production is going to be reduced.”

Let’s examine this:

Oil is currently hovering around $75/barrel.

$10 = 13.3% of $75

So a 2.6% drop in U.S. supply = 13.3% increase in World price?

I have always been horrible at algebra, but that’s some funky math.

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One Response to Voodoo Economics

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