The Oil Economy

March 16, 2006

Ok all you oil pundits and economy experts out there, riddle me this:

So the current price of oil is about $60 a barrel. That means that one liter of oil is $60 divided by 159 liters (= 1 barrel), which is $0.37 per liter.

Amazon (yeah, it’s weird, I know) will sell you two liters of Coca-Cola for $1.19.

That means that Coca-Cola is more expensive than oil. Huh?

Let’s review:

2 liters of Coca-Cola: $1.19
2 liters of oil: $0.74

Oil is more valuable, and is finite resource, and is thus more scarce. Coca-Cola is not. The price of oil is probably more inelastic than Coca-Cola, no?

How is this possible? Seriously. I don’t get it.

In related news, if you have Greasemonkey on Firefox, go get this script that will tell you how much things cost you in barrels of oil.

[via World Changing]

Comments (2)

Eston Bond says:

March 16, 2006 at 5:10 pm

I think the misunderstanding here is the idea that Coca-Cola is a finished product, made from raw materials that are scarce too, while crude oil is an intermediate good that requires further production.

Think of it this way: all that’s factored into that cost of crude is whatever it took to drill it, get it into a barrel, and get it somewhere for refinement (plus the intermediate profits). There hasn’t been any real value added (see Wikipedia) to the product aside from getting it out of the ground, and, as anyone would tell you, crude oil is pretty useless without going through refinement stages. You’re comparing the intermediate good to a final one that’s sitting on your shelf. It’d be like taking corn syrup, caramel color, water, and everything else that goes into Coca-Cola, their relative scarcities and expenses, and getting an average value of intermediate goods for the Coke.

Once more value is added to crude as an intermediate good, you’ll get a much higher price for things like, say, gasoline, which is a final product. This final product is certainly more valuable.

Also, the price of oil itself is as elastic as the OPEC cartel wants it to be; the supply elasticity of oil isn’t what people are usually talking about (at least that’s what I’ve seen;) it’s the demand elasticity – if prices change, what happens to the demand for oil?
cfarivar says:

March 19, 2006 at 5:44 pm

Point taken about the raw material thing, but even still, I’d guess that the exploration and drilling and all that certainly costs more than manufacturing Coke.

Also, say we compared Coke to gasoline — it’s a similar price, which strikes me as amazing.

It’s about $2.50 per gallon (at least out here in the Bay Area), which means about $0.66 per liter. That’s roughly similar to what a 2 liter of Coke costs. That’s pretty amazing.

Demand elasticity? I’m not following. The demand for oil (oil-products, like gasoline) is still pretty inelastic, no?