"Pipes, Not Punting, Explain Commodity Prices and Volatility"

The centrality of steeply rising costs—even for the largest, most well capitalized, most disciplined producers—is easy to illustrate, as data are abundant and transparent. Figure 2, for example, plots the quarterly average price of seamless steel against the quarterly cost of goods sold (COGS) reported by Exxon since 1Q1990.

Seamless steel is a specialty product used in drill pipes. From 1990 to 1998, Exxon’s COGS remained relatively constant around $15 billion per quarter. But as emerging market demand pressed upon marginal sources of supply, even Exxon began to see a significant increase in the costs it incurred to supply its customers with the energy they demanded. By 2Q2008, when oil prices were nearing their cyclical peak,
Exxon’s COGS surpassed $100Bn in a single quarter as the company responded to customer demand. This is 7X the 1990-98 average.

Oil prices did not rise sevenfold because of an increase in index money in futures markets: prices and the value of index positions surged because marginal costs rose sevenfold as producers had to reach into harsher basins to find and deliver oil.