Oil prices - a more realistic viewpoint

[JackDodge]

Business Week article

What passes for news on oil prices in the media is really just hype. This article is very informative and if you read it carefully, you realize that the media doesn't really know much, that speculation is the main reason for high prices and that China doesn't import much oil; their demand is met locally.

[hyo silver]

An informative article, but I question the definition of 'realistic.' I hunch most people would assume it means lower gas prices, but it aint necessarily so. Gas prices in the US have been below that of other developed nations for some time. Also, gas prices are much lower than the true economic cost, which is neither sustainable nor realistic.

[JackDodge]

Originally Posted by hyo silver

An informative article, but I question the definition of 'realistic.' I hunch most people would assume it means lower gas prices, but it aint necessarily so. Gas prices in the US have been below that of other developed nations for some time. Also, gas prices are much lower than the true economic cost, which is neither sustainable nor realistic.

I was debating whether to use 'realistic' or 'sane' or something else that would stick out as the opposite of 'hype' and realistic won out. Of course, if the issue was cost, I wouldn't have used either, actually, I would have used the words 'lower cost' or something along those lines.

The most interesting part (in my opinion)

Look to Economics 101

"You're not alone; almost everyone apparently missed my column's real point. I'm simply pointing out the poor state of reporting on oil, in which hype passes for news. The dollar has improved on the DX Index by around 5% since Mar. 17, but oil prices have risen sharply. Therefore, any reporting today that oil movements are a response to the weak U.S. dollar has been wrong. America has dropped its oil usage substantially, but that is barely mentioned. Asia turned down 500,000 barrels a day of West African crude in June. And executives with our oil companies go before Congress, and most testify that the supply-and-demand discussion is mostly overblown—and that oil should sell for between $30 to $65 a barrel. I could be wrong, but I'm thinking the oil executives might be on the mark.

"And as for the reason that oil supplies are not building right now? Simple enough. Refiners' margins, or crack spreads, are nowhere near as strong as they were this time last year. Economics 101 dictates that when sales and profits are down you don't carry excessively high inventories, particularly when future inventory costs are much higher than they were for the product you purchased just a few months ago (and might still own). If I were a low-margin refiner right now, I'd be burning off old oil inventory, which I might have purchased at $100 a barrel, before I started losing money by stockpiling oil at $140. Car dealers reduce inventories in slow periods. So do department stores. It's the most obvious reason in the world why oil reserves on hand are declining, but everyone seems to have missed that, too."

[FL_Prius_Driver]

Two questions:
1) Where do refineries stockpile oil at? Where does this "inventory" reside?
2) Why did speculators wait till this year to start increasing the price of oil by speculation?

I do not understand Econ 100 on this issue. If crude is selling for $140 a barrel, isn't it the crude oil sellers that are getting the big bucks instead of the speculators?

[airportkid]

Originally Posted by FL_Prius_Driver

Two questions:
1) Where do refineries stockpile oil at? Where does this "inventory" reside?
2) Why did speculators wait till this year to start increasing the price of oil by speculation?

1. The refineries in the SFO Bay Area have square miles of tank farms adjoining the refineries; I assume that's where the reserve inventories are stored. Googlemap Richmond and Martinez CA to see how big these farms are.

2. Excellent question and one I've been wondering about. A look at crude oil price per BBL since the late 1800s shows a more or less steady flat line of about (inflation adjusted) $20-25, with a significant hiccup at the 1973 oil embargo that eventually settled back to $20-25. The exponential skyrocket of recent price increase is unprecedented in scale and near vertical slope. Speculating is an ancient game - if most of what's going on is "speculating" why hasn't this phenomenon caused similar roiling of the market across the last century?

Commodities are auctioned, which means buyers who can't hack the price get shut out. What former petroleum users are now finding themselves shut out, and what new users (if any) dominate the market?

SOMETHING (or somethings) big must have shifted to trigger a market change of this magnitude in so brief a time - but WHAT? Speculating's nothing new - so what else has changed (other than a weakened dollar)? Who can't buy oil who used to be able to?

[Godiva]

"A recent study done at the request of Citizens Energy by The Parthenon Group, a strategic advisory firm, found that since 1996, Big Oil has increased dividends and stock repurchases by 700 percent -- three times the increase in capital spending to find and extract new pools of oil and gas. Exxon Mobil, our country's largest energy company, increased shareholder compensation by 260 percent over the past five years while boosting capital investments merely 34 percent. In a telling move, the company actually cut investments last year in domestic exploration and production by 11 percent while recording the single largest annual profit in history. Furthermore, the top five domestic producers paid their top executives more than $1 billion in total compensation over the past five years, including a staggering $300 million last year alone to their top 25 employees.
Given the chance to offer real solutions, Big Oil showed its true colors last month by marching into Congress and lecturing the American people on the virtues of supply and demand, while failing to acknowledge that global oil markets, long manipulated by cartel collusion, are not as "free-market" as one might think. The overall supply of oil has remained relatively constant over the past four years at 85 million barrels of oil produced daily. Demand has also remained constant at nearly the same level. What has changed is the perception that demand will outstrip supply down the road and the exacerbation of this perception by speculators. So, prices have skyrocketed to over $140 a barrel. As a result, Big Oil has reaped a windfall of profits that has nothing to do with their management capabilities or talents.
The oil and gas industry's current $100 million public relations campaign, which touts commitments to find new sources of energy and support the development of renewables, leaves out such inconvenient truths as the fact that Big Oil's 2007 investments in alternative energy sources averaged less than 3 percent of total capital spending and two-tenths of one percent of revenues."


Big Oil Needs to Step Up.



(But it's not going to happen.)

[JackDodge]

Originally Posted by FL_Prius_Driver

2) Why did speculators wait till this year to start increasing the price of oil by speculation?

I do not understand Econ 100 on this issue. If crude is selling for $140 a barrel, isn't it the crude oil sellers that are getting the big bucks instead of the speculators?

Actually, speculators DID drive up oil prices back in 2005. It wasn't as effective then as it has been recently. Oil sellers get rich and so do speculators, it isn't an either/or situation. As to why, it's probably not just one reason but one thing that it is doing is lowering consumption so if someone had a good reason for getting us to cut down, then the basic law of getting people to change by charging them more is working, intentional or not. If it's obvious that we're at the end of the oil era, what better way to get us to conserve? Not by appealing to our environmentalism, certainly.

[Wildkow]

Good ideas, interesting points and thanks for your work on this subject.


Wildkow

[tripp]

The reason that speculator can drive the price up is that it's like shooting fish in a barrel. Supply is tight. It's a much safer bet to wager that the price will increase in the future. In 1999 the speculators were probably shorting oil. No one was going to drive the price up by speculating high fuel prices when oil was at $10/bbl. They'd go broke pretty damn fast.

China has been a net importer since and 1993 and they are subsidizing their fuel so that folks there can afford it. Ditto India, Venezuela, and Iran to name a few. That's keeping demand strong (that and a weak dollar). Speculators are taking advantage of reality, that's why this is unprecedented in the history of oil.

[tripp]

The next geopolitical or weather induced shortage will result in an orgy of speculation.