Does one have to look at the order book at a commodities exchange (or the open interests in futures) to get supply and demand curves for oil?

What you are getting there is market participants' hopes, fears and expectations as to future price.

Futures markets are risk transfer mechanisms, that's all. The tail, not the dog.

I think that inventory in the oil markets is probably de minimis - I don't know the figures for commercial inventory - that tends to depend on whether or not the market is in backwardation, as now - but the US Strategic Reserves are limited.

A great deal of global oil is locked up in long-term supply deals, with prices set using agreed pricing formula's benchmarked against either "Dated" (not futures) Brent - around 60%, I think - and most of the rest using NYMEX WTI.

What this means is that there isn't much of a tradable "free float" (as they call it in the equity market) of crude oil, and that means that a relatively(!) small amount of money can have a disproportionate effect in relation to the segment of oil production actually tradable - and trading - on the market.

This ties in with my original rationale for the good old Iran Oil Bourse and the continuing efforts by the usual suspects to come up with a viable "Gulf " benchmark price.

Unless and until the Saudis and the Iranians put a sizable chunk of their production into the market without restrictions on re-sale there is bugger all chance of a successful "Gulf" market, or of a credible benchmark price.

But I digress.

Maybe an "altruistic economics" approach would work better for pricing so that one would look at participants' "indifference value"

ie not "what is this worth if I do buy/sell it"

but

"what do I lose if I don't buy/sell it".

"The future is already here -- it's just not very evenly distributed" William Gibson

Otherwise, it is a nice little graph with artistic merit - strongly influenced by Kandinsky's teaching in the Bauhaus basic design course, I feel. The bold use of colour and the fusion of both text and iconography is typical.

You can't be me, I'm taken

If things really don't perform as expected then they invoke "market failure". The markets have failed, not the theory. That's why they don't call it "theory failure". It's also why we physical scientists don't think much of their "theories". And from this follows why we get purged from some economic blogs and/or scolded for not understanding economics.

Personally, I'm getting a bit tired of tweaking the most hide bound economists. Perhaps you would like to join me. I suggest Mark Thoma's blog as a good starting point. He is liberal, but posts discussions about all sorts of economic positions. He only has one sore point, that's when someone (me) calls into question economic modelling.

Take a look and see if you want to participate:
Economist's View

Policies not Politics
---- Daily Landscape

The curve isn't a curve, it's a metaphor.

There is no curve. There is a rough inverse relationship. The relationship will very likely have discontinuities in it. It will not be smooth. For small sales volume, it will suffer from statistical noise.

The only way to plot the graph (not curve) is empirically. The graph cannot be calculated accurately ahead of time.

Given very large sales volumes and steady conditions, it may be possible to estimate the graph usefully based on historical conditions and a rational assessments of the effects of price points. I'd expect this to be true for large corporations selling many units of a single item in a mature market without any external shocks. In those conditions, you may get a significant figure or two out of a numerical estimate given an existing empirical base of price change data.

For more open conditions - don't waste your time. The relationship is metaphorical at best, and just plain wrong at worst.

Really? Oh yes.

Here's a data point - at this year's Big Green Gathering a company was giving away free bottles of water.

Water is a very desirable resource at festivals, especially on hot days. If supply and demand were true you'd expect the stall to be mobbed. People would rather get something free than not, wouldn't they?

In reality - not so. The stand got some interest, and it did - eventually, after a week or so - run out of water. But it didn't get a lot more interest than other stands, and people were still paying for bottles of water elsewhere on the site.

You can explain this by looking at how and why people buy water. (There's more going on than simple thirst.)

You can't explain it by looking at a simple-minded supply and demand curve, because it really is much too crude and clumsy a tool to be useful as a model in most real situations.

Alternatively - will some stall holders charge more for water when it's hot? At some festivals, yes they will.

Can you calculate how much more? No, you can't. You can guess based on what you think is likely and reasonable - and the chances are their guess will be similar to yours, at least within 50p or so.

No one is going to sell water for £10,000 a bottle. They might try £3 if they think they can get away with it. £2 is more likely.

And so on.

But empirically, from first principles? No.

But ignoring that difference for a minute, consumption is just the demand at the "equilibrium" point. Nobody is counting all the times someone goes and says "gee, I want to buy some more of this but it's too expensive" or "gee, I wanted to buy some more of this but the shelves were empty" and so the demand curve is unobserved (unobservable?). Similarly with the supply curve.

AFAIK...

That reflects the production capacities available, ranked by their production cost. So this is, in a very real sense one hal of your supply-demand graph.

For a given level of demand, you can determine very precisely the price that will be needed to fulfill that demand (that of the producer that allows you to reach that same number of MW at that moment, adding all the cheaper producers in the list before that producer's capacity is needed).

And all producers will get that price - and all consumers will pay that price (noting, of course, that the market is for wholesale electricity, and is likely to apply only a 1-hout slot of demand or other similarly short period).

With capacity essentially fixed in the short term, it is demand that varies and sets price as a first approximation. Of course, power plants can decide to bid for power at prices that are different from their actual cost, for various technical or other reasons, and modify the curve - but you can still rebuild a curve based on their bids.

If you look at the demand side, it may look flat (ie demand is not sensitive to price) but within ranges. Industrial users will have cutoff prices (and may thus take out a big chunk of demand is prices go above a certain level). Some may have storage capacity and similarly drop out of the market at some prices (and become sellers). etc...

And of course, long term decisions will be affected by how the short term S-D curve looks like, and will in turn help shape it differently.

In the long run, we're all dead. John Maynard Keynes