That may be the case if you had a monopoly over the entire oil market. In the real world if you try to sell above the market price you will go out of buisness rather quickly.
What I'm saying is that this is how market prices are figured in the normal course of business in the real world. Each industry has their standard margin, of course, but 50% is the most common target. If someone has a monopoly, especially on an essential resource, they start going to 100% or even 150% margin. This would work with oil if there were a monopoly. The United States might not, but someone in the world could afford $150.00 a barrel for oil.
Assume US oil has an EROEI of 10 as suggested by C&K data. This was being produced profitably through the 90s while oil was hovering around $20/bbl and fell to as low as $10/bbl. As were tar sands with an EROEI as low as 1.5:1 depending on who you beleive, though that figure is almost certainly too low. When Shell got involved in a tar sands project they didn't try to sell their oil for more. I'm sure they'd like to but the price is set by supply and demand as we all know and not the whims of the oil producers.
I don't think this is correct. It's my understanding that most oil is sold by contract. I would suggest that in that instance, unless the seller has a cash flow problem, it's more or less up to them to decide what to charge. Most of them charge around the same figure because they have similar production methods and similar target margins. The oil majors have established relationships with major buyers, and so there probably is some variance in actual price just due to those relationships.
I suspect, though cannot prove, that the recent upswing in price is caused not just by demand, by also by a small downward shift in EROEI.
I say EROEI is of little relevance once its above 10 or so because the change in net energy gets smaller as the EROEI value goes up. Going from 3:1 to 5:1 is a big difference but going from 10:1 to 12:1 is much smaller. Even the difference between 5:1 and 10:1 is greater (twice as large) than the difference between 10:1 and 20:1. The best way to think about EROEI is the amount you get net out of 100 gross units of energy. This moves towards an asymptote of 100 as EROEI --> infinity.
I understand exactly what you're saying. My point back is that when it comes to money, this doesn't really matter. I suspect that part of the reason my point hasn't made much sense is because of the scale we're using, so try this example on instead:
Suppose oil costs $60.00 a barrel, and a major oil company is pumping 20 million barrels a day. That's a lot, but let's say that's what happens. Now, we'll begin where the EROEI is 100:1. So the oil company gives up $12 million per day in cost of goods. If the EROEI drops to 50:1, they give up $24 million to get the same amount of oil. Any executive in any company anywhere is going to look at that kind of increase and her blood's going to boil; she will insist that their prices be increased so that they attain the same profit/ cost ratio they had previously enjoyed.
Had it dropped to 85:1, it probably wouldn't be so bad. Eventually, it'll cross a mark where, as costs go up, people lose their jobs, marketing budgets are cut, etc. Once an economy is set up with money flows around a certain level, any kind of disturbance has a huge effect on the end user.
As I think about it, though, I think you probably do have a point as we approach closer and closer to 1. Prices won't increase linearly. I don't know, actually, what the relationship would be.
I understand the argumant and energy is clearly a part, but you can't say for sure whether the main cost is energy, or labour, or something else.
Well, I would include labor in energy.
One can argue that the cost of "something else", eg steel, copper, concrete etc represents the energy that goes into producing it....or you could also argue that the cost of oil represents the cost of the material that goes into producing it...its a bit of a chicken and egg argument and causality is difficult to determine.
I don't think so. I think that the thought experiments regarding the use of sunlight and air incline towards energy being the prime factor. As Defiled Engine said, materials by themselves are useless. Someone has to make them useful. No one without the expectation that labor is going to be applied is going to buy a few tons of bauxite. But note that the reverse example--that no one is going to buy a bunch of labor without the expectation of material to work on, just doesn't make any sense. Labor entails work done.
You can get an idea by calculating GDP produced per dollar of energy used, I'm too lazy to do that right now but IIRC energy represents 5-10% of the US GDP, others like China will be more energy intensive, but if money only represented energy all GDP would be spent on energy, resulting in a rather poor economy. I do agree energy is definatly a significant and important part of it though.
This isn't exactly what I'm saying. A little energy=a lot of money is my basic premise. Sure, we attach a dollar value to a barrel of oil, and that dollar value doesn't equal the value of everything that is produced by the energy contained therein. Economically, $60.00 of oil produces perhaps $6000.00 of value. This is why, as the cost of oil goes up, the cost of everything else goes up such a ridiculous amount (eventually). The cost of oil has tripled in the last few years. We probably won't see this work out as retail prices doing the same in the next few, just because that level of inflation would itself be ruinous. Instead, we'll see exactly what we are seeing, only lots more of it. Lower wages, fewer jobs, less benefits, and moderately increased prices coupled with lots of speculation (like "flipping" houses). Businesses are doing this to keep their margins in line. It's a dirty game, and it's not one anybody can win. But that's what we're seeing.
Certain happenings can stave off the inevitable, however. Katrina and Rita will actually be good for the economy in the medium term, as all the cash the oil companies are sitting on will be used for hurricane clean-up. Other opportunities may present themselves to restore or shore up faith in our currency, but eventually, that will stop.