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24 July 2008

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TomB

Curious wrote:

"Also note: our so called efficient oil industry/market economy is giving us extremely unstable and high oil price."

Oh my goodness, Curious, you think it's high? First of all it seems to me clear that the instability of the prices you complain about derives not from the oil companies or the fundamentals of supply and demand but due to the actions of the very political bodies (i.e. countries) that you want to take over the oil business completely. Yesterday they're at war over this, today over that, tommorow over something else....

And secondly think about the cost of a bloody gallon of milk in comparison. Or even a bag of sand. Geez. That oil in your tank is coming from some godforsaken place in the arctic, or in Saudi Arabia or Asia, or from deep beneath the North Sea. Take away the taxes on oil and then figure it first had to be located, and then tapped, and then transported (at what ... 8 lbs. per gallon?), and then refined, and then transported to your local gas station, and you think it's *high*?

Indeed, it's been the *low* price of oil that's really the fundamental stick in the craw of the enviros, isn't it? It's too cheap and so we rely on it too much. I mean ... given all that's involved in getting isn't it amazing that it's *still* a helluva lot cheaper to burn it for energy than tapping the freaking sunlight?

"That's why all oil rich states are so screwed up and have stunted development...."

Well first of all I note how this is a 180-degree change from your previous exhortation for us to *emulate* all these others. So now you appear to be on board with me in observing that in good part it's precisely *because* these folks have so nationalized things that they are so screwed up.

It ain't that capitalism and competition is perfect, it's just the ugly fact that life is a matter of choosing amongst less than perfect alternatives.

Cheers,

Mark  Logan

Mr. Sheperd,

The "how" is an interesting story. There were six hours of testimony given to Congress on June 23rd. I recommend at least
part 1 (of 4) for the gist.

http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=206134-1&highlight=

whynot

Finally something I agree with the Colonel on, "think for yourselves".

Let's see, the value of our currency has has dropped 40%, the rise of the consumption of oil each and every year outstrips all new production all the while the biggest fields we've relied upon (Cantarell and Gawahr amongst others) show massive rates of depletion. Yes, it's the speculators causing the problem.

Please people, think for yourselves. Stop letting the government and those who seek to blame others for the circumstances we're in think for you. This crisis will only grow, and demanding gov't action of a demand/supply problem is no solution at all. It wreaks of weakness and immaturity and is no better than the way we are bailing out the financial institutions.

And as I and a few others have mentioned, oil has played the forward and back game over and over again since 2002. Be smart, and take advantage of any the price break. The government can't save the oil price. What'll it be, global depression or an 'expensive' oil price? You get one or the other, but not both. It's the world that Greenspan built, we're just living in it.

J. S

I am really pleased to read that "the heard mentality" seems to run amok in the US of A.

Thank God we are Canadians, unfortunately, our Canadian George Bush, also seems to want us to think the same way.....

William R. Cumming

Note that once Norway and Britain's oil fields are depleted (2015?) the number of nation's with privatized oil companies will be less than a dozen. I would argue that lobbying fees alone, but also add in tax expenditures through depletion allowances and write-offs and leasing from federal land make this industry like FNMA and FHLMC an industry with privatized benefits but socialized costs. Arguably except for ethnic cleansing, the corporate statism represented by fascism in the 20's 30's and 40's, is very very close to what we have here. One difference, reasonably free elections held every other year, but without federal voting standards and low voter turnout almost always guarantees incumbency and no real oversight by the public. This year might be different.

LJ

"http://www.econbrowser.com/archives/2008/07/oil_prices_and.html>Is the price of oil today too high given the fundamentals? Could be. Is it too low? Could be. But one thing I'm sure that's too high is the confidence on the part of those who insist they know the answer.

James Hamilton at the Econbrowser cautions those who claim to "know" that the price of oil is either too high or too low.

LJ

Not to deny that the oil markets may have long way to go on the downside, there are credible people who think that speculators play a valuable roll in helping to lay off risk. http://www.news.uiuc.edu/news/08/0725speculators.html>Here is one who thinks oil could go up due to curbs on speculation.

Patrick Lang

For those to whom this may apply

We are now down about $23/barrel from the high. Let me know when your search for "credible" opinion begins to splinter under the pressure of reality. pl

TomB

Ah Colonel, you've constructed an unscrewable pooch of an argument: The price goes up and "it's speculators!" The price goes down and ... "it's speculators!"

That said I think I understand what you mean by "speculators" now and while I am of the school that in the main they help spread risk and don't have bad consequences, I'd fully agree they're a greedy bunch of bastards. So even though we disagree we can both be happy that a good number who went long on this bubble are now taking it in the shorts but good.

Cheers,

Patrick Lang

Tomb

Of course the discussion is of Obama's character. You don't actually believe campaign policy statements, do you?

In re my "uscrewable pooch" of an argument. Yes. you get it. Investors made the short term price go up. Nothing illegitimate about that, just bad for the rest of us. Now their flight and fear are taking the short term price down - down - down - down. pl

whynot

The long term upward move of oil will continue unabated. Markets move forward, get too crowded, they pull back and the process starts again. Look at gold, oil, and commodities in general over the past 6 years. Oil has retraced, and has more room to retrace to the downside before moving forward again. And as much as anything, it's our currency. Why people don't grasp this concept bewilders me. The cost of oil has not risen 4 fold for other nations b/c there currencies haven't dropped in value as has ours. It's a pretty simple concept and one the readers of this forum should understand.

Until there is a viable alternative to oil or there is a huge economic dislocation, you can count on the price of oil (and everything you need for that matter) to continue to rise. You can't pump money into a financial system as the Fed has done, and not expect inflationary damage to run rampant. If you must blame somebody because you haven't been able to either take advantage of the situation yourself, nor figured out how to live your life not overly dependent on oil blame Fed policies. But please stop crying 'speculators' b/c all it shows is that markets are something you don't understand. More gov't regulation will simply allow the biggest players even more control while shutting down the mechanisms which allow a fair price. Be careful what you wish for when it comes to 'controlling the speculators'. All you'll get is even higher prices.

Shepherd

The reason you can't figure it out, is b/c there is nothing to figure out. The markets are too large for somebody to manipulate. Having lived the other side, where people are sure the gov't tries to keep the price of gold down, dealing with those who think there are market conspiracies is maddening. That's an awful lot of people who can keep secret.

TomB

whynot wrote:

"The long term upward move of oil will continue unabated. Markets move forward, get too crowded, they pull back and the process starts again...."

I don't know what the long-term move of oil will be, but to the extent this is saying that a rise will be ineluctable because of the way markets supposedly work I think it's wrong. The way I read some quickly looked at data from before 1950 until the OPEC business started in 1972 not only did the inflation-adjusted price of oil decline slightly, but so did the actual nominal price.

From '72 to '79 it was then of course kept real high (reaching an inflation-adjusted peak of about $100 per barrel), and then declined precipitously and bottomed out in about '84, Until about '90 then there was a slight rise, a sharp spike in about 1990, and then again all the way until '98 a gradual decline.

In short, there's seems to be real long periods of fairly stable if in fact not declining oil prices, punctuated by what seem to be ... politically caused spikes for want of a better term. And if I recall the nominal price of oil right before 9/11 and the Iraq war was at only about $25 a barrel, which was damn close to what we were paying in that only-once-interrupted and thus fairly stable 1984-'98 period, if not below it in inflation-adjusted terms.

Maybe they're right, but those who are so confident that oil is now only going to be in the (relative) stratosphere sound an awful lot like a lot of people back after '72 who now look so foolish. Seems to me an argument can be made that if you just leave the market alone, it's done real fine.

"But please stop crying 'speculators' b/c all it shows is that markets are something you don't understand."

Oh, there have been instances where speculators have indeed caused all kinds of problems and phenomenon in different markets. The Hunt brothers trying to corner silver if I recall correctly, and of course George Soros has been accused of doing so with currency trading.

I don't think that's the case with oil, but I don't think you can paint people who believe otherwise as economic illiterates either.

Cheers

zanzibar

If ever we need the SEC to investigate something pronto its John Thain and Merrill Lynch's new capital raising and CDO write off.

On July 18th - that's just a week ago - Merrill released its earnings report. No where did they discuss the CDO write-off or the capital raising that would substantially dilute existing shareholders. Now, a week later they take existing shareholders to the cleaners. These statements over the past months by Thain are misleading public investors. This is what Chris Cox should be investigating rather than blaming short-sellers for causing the tailspin in banks. No short-seller forced Merrill, Citi, Bear Stearns and Lehman to commit their shareholder capital to the ponzi scheme of leveraged mortgage speculation.

shepherd

If this is correct, it answers the question I posed about mechanism.

http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.Masters-testimony.pdf

The brief summary is that futures prices directly affect spot market prices because spot markets take their marching orders from futures market in oil and a number of other commodities...not the other way around.

from the document:

Because commodities are bulky and costly to transport, spot markets for commodities are geographically dispersed. Many decades ago, local markets relied almost exclusively on local supply and demand to determine prices, with the result being that there were sometimes great differences between prices in various regional spot markets.

This began to change in the 1980s, when spot market participants in the agricultural and energy markets moved to embrace centralized futures markets as the best indicator of overall supply and demand conditions across all spot markets.12 Because of the benefits of price discovery and risk hedging that the futures markets provide to physical commodity producers and consumers, today those participants have agreed to price nearly all spot market transactions at the futures price plus or minus a “local basis” or “differential.”

The CFTC describes it this way: “In many physical commodities (especially agricultural commodities), cash market participants base spot and forward prices on the futures prices that are “discovered” in the competitive, open auction market of a futures exchange.”Platts, which is the leading pricing service for the energy industry, describes it this way: “In the spot market, therefore, negotiations for physical oils will typically use NYMEX as a reference point, with bids/offers and deals expressed as a differential to the futures price. Using these differentials, Platts makes daily and in some cases intra-day assessments of the price for various physical grades of crude oil, which may be referenced in other spot, term or derivatives deals.”

In other words, these futures markets do not operate in a disassociated way from spot markets, which is what many people on this board, including myself, have assumed. They are, in fact, the market.

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