The Oil Drum

9 comments on The Chinese don't think oil is fungible

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Glenn on August 26, 2005 - 7:13am

I hope this analogy does not incur any more sandwich shop references, but imagine you are a baker. Normally flour is purchased cheaply, you process it into bread, feed your family and sell as much of the surplus to all your customers who are happy they can buy bread and not make it themselves. What if one day there was a disruption that caused flour to stop coming, or at an extraordinarily high price. No matter what you are still going to feed your family. Maybe you sell one extra loaf (at a very high price) to pay for other essentials. But until the disruption ends, you may just sit on your stockpile of flour as long as possible and deny access to your customers to continue to baking for your family. The same is true of oil producers - they will not sell the oil if their citizens need it. They will sell just enough to afford the other items they need and not more.

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Stuart Staniford on August 26, 2005 - 10:37am

This is true for food and families, but not true for food and nations. African nations are frequently exporting food while their people are starving. I imagine oil will work similarly. Most oil reserves are already nationalized - the question is whether the government and national oil companies will want to sell oil cheaper on the internal market than they can get on the external market. Indonesia and China are becoming case studies with what happens under that approach. Black markets and smuggling will limit the ability to do so (as in Iraq).