mgroves

Fungible: A description applied to items of which each unit is identical to every other unit, such as in the case of grain, oil, or flour.

Fungibility is why the phrase “foreign oil” makes no sense. Yet even though it’s right there in the dictionary, many people still don’t seem to get it.

Take, for instance, the AP when talking about Chavez’s latest nonsense about cutting off oil to Exxon. It’s bologna:

• Venezuela will still sell their oil
• Supply will remain the same
• Price will remain the same
• If anything, Venezuela would be screwed, because their oil needs special refineries which don’t really exist outside the U.S.

And yet, the first line of the AP article says: “President Hugo Chavez sent a soothing message to American motorists on Sunday, saying that Venezuela is not preparing to cut off oil shipments to the United States.” Why is it soothing? It was all either empty threats or cut-off-the-nose rhetoric from a lunatic dictator, neither of which would have hurt “American motorists” (I guess any company involved with plastics doesn’t matter) enough that any soothing would be required.

It’s simple economics. Equilibrium price will change if supply shifts or demand shifts (see above diagram). That is, Demand goes from D to D’ or Supply goes from S to S’.

Oil is a global market with a fungible product. So just do a simple analysis about Chavez’s threat. Would he stop selling oil to everyone? No–he likes taking oil profits to fund his totalitarian, socialist programs. So the supply wouldn’t increase or decrease. Would the demand for oil change because of this? Nope. Therefore, the equilibrium price will remain the same.

Similarly, anytime someone says that they want to “reduce dependence on foreign oil”, the same analysis applies. Foreign oil doesn’t make any sense. Reducing the demand for all oil would shift D to the left, reducing the price.

For a much more detailed overview, I recommend reading Oil Econ 101.

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