Oil and what really scares me

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Oil and what really scares me

Postby Lathander » Sun Jun 22, 2008 9:33 pm

A number of Dems are out there talking about nationalizing the oil industry. Talk about a bad, bad idea.

http://www.youtube.com/watch?v=1vhft39_gkc

http://www.youtube.com/watch?v=PUaY3LhJ-IQ

Here's an article by another alumni from Maryland that understands why you have to have the profit motive, ie capitalism. Personally, I find talking about specific examples better than some vague conceptual argument on morals.

________________________________________
No Profits, No Oil
Tuesday, June 17, 2008

By John R. Lott, Jr.

E-Mail Respond Print Share:

If a product is in short supply and if you really wanted more to be produced quickly, would you want companies to think that they could earn a lot of money making it?

You would think that the answer is pretty obvious: No profits, no oil. To encourage more production, companies need to think that there are more profits to be made. With all the anger over high oil prices, more production to lower prices would seem to be a high priority.

But outside of most congressional Republicans, particularly those in the Senate who successfully filibustered a new wind-fall profits tax on oil companies, no one wants to admit what profits do.

Unfortunately, both the Democrat and Republican presidential candidates are both attacking oil company profits. Barack Obama promises, "We've got to go after the oil companies and look at their price-gouging. We've got to go after windfall profits." John McCain says, "I am very angry, frankly, at the oil companies. Not only because of the obscene profits they've made, but their failure to invest in alternative energy to help us eliminate our dependence on foreign oil."

RelatedStories
Is It Really a '$3 Trillion War'? Not to be outdone, congressional Democrats are just as upset. New York’s Senator Chuck Schumer claimed: "Oil companies are racking up obscene profits left and right while American families are stretched to the limit by skyrocketing gas prices. It's time for Big Oil to pay its fair share . . . ."

The defense of oil companies has been much to, well, defensive. Some pundits and those in the industry point out that energy companies aren't really making that much money. While the energy companies during the first quarter of this year had an average profit margin of 7,4 percent, the average Dow Jones Industrial Average company earned 8.5 percent. For example, ExxonMobil, which Obama has singled out for particular criticism, made an “obscene” $40 billion in profit, but that is on $404 billion in sales.

Much of the discussion concerning record high profits is misleading as it focuses on the dollar amount of the profits not the profit rate. As sales have also gone up over time, of course total profits have gone up, too. Nor are looking at just a couple of years particularly useful.

Others point out federal, state, and local governments have made more from gasoline taxes than the large U.S. oil companies have earned in total U.S. profits.

But all this assumes that companies should prove that their profits aren’t “too large.” That high profits aren’t good. Do customers want more gas? Higher profits increase production, driving down both prices and profits.

Ironically, at the same time politicians are complaining about corporate greed, they understand the importance of incentives. If Obama didn’t think that companies responded to incentives, why else would he propose that $150 billion be spent by the government on developing alternative energy?

McCain’s anger about the failure of oil companies “to invest in alternative energy” neglects to ask why companies aren’t investing enough in this on their own. Why do we need massive subsidies, as proposed by both Obama and McCain? The answer is simple: those alternative energy sources cost more than the benefits that they produce. If they were profitable, no subsidy would be necessary.

Would you take money from investments that are currently making a 9.7 percent return and putting them into projects that generate a negative return? Presumably not, and neither would Obama nor McCain if his own money was at stake. It would make you poorer, it would make him poorer.

Besides the politicians who are bashing the oil companies and pushing for wind-fall profit taxes understand that more oil would mean lower prices. Senator Schumer insists that "If Saudi Arabia were to increase its production by 1 million barrels per day that translates to a reduction of 20 percent to 25 percent in the world price of crude oil . . . “ Schumer is so angry that he is blocking selling military supplies to Saudi Arabia until they increase production.

Unfortunately, all this oil company bashing means that prices will rise even if wind-fall taxes are never imposed. Just the threat of the taxes will dissuade some oil companies from drilling today.

Despite all the concerns about reducing our dependence on foreign oil producers, the last things many politicians seem to want is more oil production by American oil companies. While forcing firms to apologize for their profits is bad enough, the Democrats push for a wind-fall profits tax seems to prove that they have no desire for more oil production and no desire to do what they can to lower prices.

John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.
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Re: Oil and what really scares me

Postby Kifle » Mon Jun 23, 2008 1:15 am

I stopped reading here.

If a product is in short supply and if you really wanted more to be produced quickly, would you want companies to think that they could earn a lot of money making it?

You would think that the answer is pretty obvious: No profits, no oil.


Why would they make more oil if they would lower prices per barrel and extend the life of wells like they are doing now? Is this guy serious?

I could have swore there was tons of oil available and being pumped in the mid-late 90's and it was 300% cheaper. You seem to think that extrodinarily-super-fucking-blow-your-mind high profits = profits in general. I'm sorry, but they would easily profit off of $2 a gallon at the pump.
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Re: Oil and what really scares me

Postby teflor the ranger » Mon Jun 23, 2008 4:39 am

Kifle wrote:I stopped reading here.

If a product is in short supply and if you really wanted more to be produced quickly, would you want companies to think that they could earn a lot of money making it?

You would think that the answer is pretty obvious: No profits, no oil.


Why would they make more oil if they would lower prices per barrel and extend the life of wells like they are doing now? Is this guy serious?

I could have swore there was tons of oil available and being pumped in the mid-late 90's and it was 300% cheaper. You seem to think that extrodinarily-super-fucking-blow-your-mind high profits = profits in general. I'm sorry, but they would easily profit off of $2 a gallon at the pump.


If you read the whole thing, perhaps you'd have a more informed opinion and respond to more than just your personal understanding of the first two lines. The reason is competition. It's called a market for a reason. A major function of one organization in a market is to beat out the competition, you see, in order to increase market share.

This is why most capitalistic societies are anti-trust.

The main reason for high finished automotive gasoline prices right now is better attributed to speculator demand, rather than end-user demand. Read this properly: there is no shortage of crude oil for end users. It's just a shortage for people wanting to buy up the rights to resell it. Gasoline and the entire crude oil chain of products right now, speculators and investors are willing to pay insanely high prices for it.

And there go the prices.


On an unrelated note, concerning Lott's little e-mail there, I do have to say that while alternative energy sources require subsidies, that is not necessarily a permanent situation. There are many alternative energy sources that are coming into their own as their industry and technology develops.
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Re: Oil and what really scares me

Postby Botef » Tue Jun 24, 2008 6:11 pm

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Re: Oil and what really scares me

Postby Botef » Tue Jun 24, 2008 6:34 pm

With prices at $135 dollars a barrel, everyone is trying to pump as much as they can, he said. But fearing oil prices will eventually fall, the industry is leery about making too many investments in the fields it has - many of which are in deepwater areas that can be pricey to develop.

Instead, they're holding out, hoping the government will open areas closer to shore that would be cheaper to work on.


Now here is my question, if record profits every quarter isn't incentive enough to invest and develop currently available resources how is offering further incentive (off shore drilling) going to do anything in the long term. 5-10 years down the road if and when off shore drilling starts producing oil, assuming prices do infact drop, will that incentive to invest and extract oil from our own land be expired? Then what? Will these off shore facilities be able to compete with foreign oil sources should the prices normalize and would our foreign oil dependence really be reduced much? Does it out weigh ecological concerns? I really don't know!

I'm not for nationalizing oil or anything extreme like that, but I can't say I'm very sold on the idea of off shore drilling being a solution to our foreign oil dependency when the oil companies admit that even with these high oil prices they see little reason to invest in what is already available. What assurances do we have that if prices begin to drop as a result of off shore drilling that these companies won't again cease investing in future sources on american soil because of diminished returns.
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Re: Oil and what really scares me

Postby Corth » Tue Jun 24, 2008 7:59 pm

Sorry but that article you linked to is complete shit. At $140 per barrel there is an enormous amount of incentive to get as much oil out of the ground as possible. So 90 million offshore acres are leased, and 70 million aren't being produced. News flash! Not all land that is leased for the purpose of oil exploration even turns out to have oil. Not even close. And even when its uncertain, there aren't enough drilling rigs in the world to explore everything all at once. These oil companies hire very expensive geologists to figure out for them where the greatest likelihood of a significant discovery will be found. Exploration is expensive, and even 'big oil' has to prioritize where its going to spend its money. Even then, there are no sure things. On the other hand, we know pretty damn well that there are some serious untapped oil reserves close to shore which are less expensive to drill and almost certainly have oil that can be exploited.

5 years from now when people are spending over $10 per gallon or more on gasoline, there is going to be a serious reaction against the environmentalists and 'not in my backyard' types who have resisted an increase in domestic supply. Long term we will need alternatives to oil.. but the bridge to a post-carbon economy is going to be very difficult to cross. The less oil produced in the meantime, the more painful it will be.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

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Re: Oil and what really scares me

Postby Sarvis » Tue Jun 24, 2008 8:47 pm

Corth wrote:5 years from now when people are spending over $10 per gallon or more on gasoline, there is going to be a serious reaction against the environmentalists and 'not in my backyard' types who have resisted an increase in domestic supply.


If only because the right is far better at scapegoating and demonizing the competition than the left.

Long term we will need alternatives to oil.. but the bridge to a post-carbon economy is going to be very difficult to cross. The less oil produced in the meantime, the more painful it will be.


Yes, alternatives... which the right has constantly denied the need, funding and desire for. Damned hippies!
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Re: Oil and what really scares me

Postby Corth » Tue Jun 24, 2008 9:18 pm

Who is supposed to fund alternatives Sarvis? Taxpayers? Why should they. The free market is throwing zillions of dollars in capital at it as we speak. Solar, wind, etc. So are you saying that government should be spending taxpayer dollars on it too?

If anything, the government should step aside and let the free market do what it does best. If Brazilian sugar was not tarrifed at such a high rate, the cost of ethanol would go down in this country.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 12:14 am

Corth wrote:Who is supposed to fund alternatives Sarvis? Taxpayers? Why should they. The free market is throwing zillions of dollars in capital at it as we speak. Solar, wind, etc. So are you saying that government should be spending taxpayer dollars on it too?


Zillions of dollars? Prove it. I somehow doubt you're looking at the balance sheets for every company out there and totalling up their spending on research. Are you trying to claim that all progress comes without government funding? The fact that we're talking to each other disproves that!

But yes, taxpayer dollars should be funding research to make our lives better even if companies are doing their own research.


If anything, the government should step aside and let the free market do what it does best.


What would that be, trash technologies that would have gotten us out of this mess? Didn't we do this already a couple weeks ago?

Besides, given that higher oil prices have meant higher profits for oil companies I'm really just not sure they have much motivation to research alternatives.
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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 12:15 am

Note that there is no lack of crude oil in the market. There is enough supply. That is to say, adding more crude won't meaningfully bring down prices. (It might calm investors somewhat, though, which will lead to a slowdown in speculation which will slow down prices.)

Also, note that oil companies are some of the largest investors in alternative energy sources.
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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 12:17 am

Sarvis wrote:
Corth wrote:Who is supposed to fund alternatives Sarvis? Taxpayers? Why should they. The free market is throwing zillions of dollars in capital at it as we speak. Solar, wind, etc. So are you saying that government should be spending taxpayer dollars on it too?


Zillions of dollars? Prove it. I somehow doubt you're looking at the balance sheets for every company out there and totalling up their spending on research. Are you trying to claim that all progress comes without government funding? The fact that we're talking to each other disproves that!

But yes, taxpayer dollars should be funding research to make our lives better even if companies are doing their own research.


If anything, the government should step aside and let the free market do what it does best.


What would that be, trash technologies that would have gotten us out of this mess? Didn't we do this already a couple weeks ago?

Besides, given that higher oil prices have meant higher profits for oil companies I'm really just not sure they have much motivation to research alternatives.



I'm not sure what point you're trying to make Sarvis. It's obvious a lot of private money goes into important research.
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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 2:17 am

teflor the ranger wrote:Note that there is no lack of crude oil in the market. There is enough supply. That is to say, adding more crude won't meaningfully bring down prices. (It might calm investors somewhat, though, which will lead to a slowdown in speculation which will slow down prices.)

Also, note that oil companies are some of the largest investors in alternative energy sources.


Where do you find this garbage? Show me where there is sufficient supply. Well, actually, there IS sufficient supply.. once a whole lot of demand is destroyed due to high prices. Is that what you are getting at when you say there is enough oil?

I'm sorry but speculation in the oil market has absolutely *zero* effect on end prices. Everyone can buy oil contracts, but ultimately, the only entity taking physical delivery of the oil are refineries. They are the final bidders. Nobody else has any use for the stuff. If there is sufficient supply, the refineries aren't going to start raising their bids.

*rolls eyes*
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 2:26 am

Sarvis,

Yes I was being literal when I said a 'zillion dollars'. /sarcasm

No, I can't add it up. Nobody can. Suffice to say, there is a LOT of capital being thrown at alternative energy. Lets give a for instance. One of thousands of examples. I own a stock called Energy Conversion Devices (ENER). They license battery technology used in hybrids, and manufacture solar panels, among other things. Go pull up a stock chart and take a look at the price action over the past 6 months or so.

With a market cap currently of about 3.2 billion dollars, thats almost 2 billion dollars in private money being pledged towards alternative energy in the past few months. At the current price of the stock, ENER can raise an enormous amount of capital by selling some shares. A lot more capital than they could have just a few months ago. This is the market voting with its wallet... as opposed to scummy politicians doling out our money on the basis of what is going to best get them re-elected.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 3:17 am

Corth wrote:
teflor the ranger wrote:Note that there is no lack of crude oil in the market. There is enough supply. That is to say, adding more crude won't meaningfully bring down prices. (It might calm investors somewhat, though, which will lead to a slowdown in speculation which will slow down prices.)

Also, note that oil companies are some of the largest investors in alternative energy sources.


Where do you find this garbage? Show me where there is sufficient supply. Well, actually, there IS sufficient supply.. once a whole lot of demand is destroyed due to high prices. Is that what you are getting at when you say there is enough oil?

I'm sorry but speculation in the oil market has absolutely *zero* effect on end prices. Everyone can buy oil contracts, but ultimately, the only entity taking physical delivery of the oil are refineries. They are the final bidders. Nobody else has any use for the stuff. If there is sufficient supply, the refineries aren't going to start raising their bids.

*rolls eyes*


Corth, show me where there is insufficient supply. That is to say, show me a refinery that can't find crude.

The physical supply is sufficient, it's the willingness of rights holders to sell at lower prices that is low in supply - but those are always relatively low in supply.
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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 3:21 am

Corth wrote:Sarvis,

Yes I was being literal when I said a 'zillion dollars'. /sarcasm

No, I can't add it up. Nobody can. Suffice to say, there is a LOT of capital being thrown at alternative energy. Lets give a for instance. One of thousands of examples. I own a stock called Energy Conversion Devices (ENER). They license battery technology used in hybrids, and manufacture solar panels, among other things. Go pull up a stock chart and take a look at the price action over the past 6 months or so.

With a market cap currently of about 3.2 billion dollars, thats almost 2 billion dollars in private money being pledged towards alternative energy in the past few months. At the current price of the stock, ENER can raise an enormous amount of capital by selling some shares. A lot more capital than they could have just a few months ago. This is the market voting with its wallet... as opposed to scummy politicians doling out our money on the basis of what is going to best get them re-elected.



Ok, I'll grant you that this one company is doing well in the market. If you'll grant me that tomorrow one rumor about the CEO quitting or a new source of oil or some other stock price soaring could send that price right back down. Those shares aren't going up because people want to fund alternative energy, they're going up because people expect it to go up.

It's not much of a basis for conducting any long term research, frankly. ENIAC, the internet, semiconductors, biotech, energy saving, fuel cells, GPS... the government funded the research for all of it at some point.

Simple fact is that eveyrthing that is beneficial is not going to be profitable, but if a taxpayer funds can bring the initial research to a high enough point private industry can then make it profitable. That's what happened with the computer, right?
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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 4:48 am

Its going up Sarvis, because of the profit motive. The stock market is an amazing mechanism of bringing capital to companies that provide the public with what it wants and needs.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 4:58 am

teflor the ranger wrote:
Corth wrote:
teflor the ranger wrote:Note that there is no lack of crude oil in the market. There is enough supply. That is to say, adding more crude won't meaningfully bring down prices. (It might calm investors somewhat, though, which will lead to a slowdown in speculation which will slow down prices.)

Also, note that oil companies are some of the largest investors in alternative energy sources.


Where do you find this garbage? Show me where there is sufficient supply. Well, actually, there IS sufficient supply.. once a whole lot of demand is destroyed due to high prices. Is that what you are getting at when you say there is enough oil?

I'm sorry but speculation in the oil market has absolutely *zero* effect on end prices. Everyone can buy oil contracts, but ultimately, the only entity taking physical delivery of the oil are refineries. They are the final bidders. Nobody else has any use for the stuff. If there is sufficient supply, the refineries aren't going to start raising their bids.

*rolls eyes*


Corth, show me where there is insufficient supply. That is to say, show me a refinery that can't find crude.

The physical supply is sufficient, it's the willingness of rights holders to sell at lower prices that is low in supply - but those are always relatively low in supply.


Teflor,

If the refineries have sufficient supply, as you suggest, then the 'rights holders' of the oil are up shit creek. The day will come that they have to either sell the oil to a refinery, which presumably isn't willing to pay very much since it has a sufficient supply, or take physical delivery of however many thousands of barrels of oil they own the rights to. That doesn't really happen very often does it? Not many commodity investors actually take spot delivery. What good would a few thousand barrels of oil do for me or you? Not very much.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 6:11 am

Corth wrote:Its going up Sarvis, because of the profit motive. The stock market is an amazing mechanism of bringing capital to companies that provide the public with what it wants and needs.


So then when the market crashes it means the public no longer wants anything?

Look, you're missing the point. Their stock price is high now because people are expecting them to be able to sell product and make profit. No one is going to buy stocks so they can sit around for 10 years waiting on research to come through.

Luckly for ENER, and your stock portfolio, the Department of Energy gave them some money to do research with 10 years ago: http://www.ovonic.com/ne_ecd_ovonics_pr ... ase_id=302
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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 2:21 pm

First off, the DOE shouldn't be handing out taxpayer money for that type of purpose. However, you can't blame a business for taking it, as it would put them at a competitive disadvantage to other companies taking handouts if they didn't. Thats one of the problems with government handouts. The government gets to pick who they want to help, and everyone else gets screwed.

Stock market crashes, and the so-called 'boom and bust' cycle, IMHO, are usually a function of a market reverting to equilibrium after years of misallocation caused by government intervention. In the current situation, the housing bubble was clearly inflated by Federal Reserve cheap money policies and other governmental programs that promote home ownership. Its really more of a credit bubble than a housing bubble per se. The resulting crash, which many have been predicting since as far back as 2003, is affecting the broader economy, as many jobs are lost (first housing related, but later broader unemployment).

Look, you're missing the point. Their stock price is high now because people are expecting them to be able to sell product and make profit. No one is going to buy stocks so they can sit around for 10 years waiting on research to come through.


One thing you have to understand is that the stock market is VERY forward looking. Investors give a lot of weight to future expectations of profits. Its interesting that often times a stock will go down on good news, or up on bad news. Thats because the news is already 'baked into the cake'.. i.e., it was expected. Investors anticipated certain things which impacted the price of the stock well before they actually happened.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 2:41 pm

Corth, this is simple.

You have two choices:
1) Invest in company Y and watch your money NOT grow for 10 years
2) Invest in other companies, watch your money GROW for 9.5 years and THEN invest in company Y to see your money grow again 6 months later?

Which do you choose?

Yes, investors look at long term. They look at their own personal money growth over the long term. Letting money sit in a company that isn't making a profit yet is NOT going to do that. That's pribably why their stock price has grown so slowly over the intervening 10 years.

Remember Corth, YOU are the person who says no one does anything without profit motive. What's the profit motive in waiting 10 years to see a significant return on your investment vs. seeing a significant return in a year?

In fact, it's demonstrable with the company you're citing. Their stock price has tripled since "Energy Conversion Devices Inc (ENER.O: Quote, Profile, Research, Stock Buzz) swung to a quarterly profit, beating Wall Street view, on higher demand for its solar products" - http://www.reuters.com/article/marketsN ... 2620080508

There were a few people speculating that eventually solar had to get profitable, they finally actually turned a profit and suddenly the stock price triples.

Exactly.
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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 3:23 pm

Sarvis,

If you invest in company Y 6 months before it starts reaping the rewards of its R&D, then you have already missed most of the appreciation of the share price. Don't get me wrong, there are many factors that go into stock market valuation. Future expectations of profits are an important one.

In the case of ENER, one major thing happened that was not anticipated by investors until recently. The price of oil skyrocketed, which created more demand for ENER's solar panel product. But not only is there more current demand, there is also a much greater expectation of future profits as investors now believe that oil prices will continue to remain high, or even go up over the long term, so solar becomes a more viable technology.

And that, of course, is the main point. A ton of capital is being thrown at companies that produce alternative energy technology.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 3:41 pm

Corth wrote:Sarvis,

If you invest in company Y 6 months before it starts reaping the rewards of its R&D, then you have already missed most of the appreciation of the share price. Don't get me wrong, there are many factors that go into stock market valuation. Future expectations of profits are an important one.

In the case of ENER, one major thing happened that was not anticipated by investors until recently. The price of oil skyrocketed, which created more demand for ENER's solar panel product. But not only is there more current demand, there is also a much greater expectation of future profits as investors now believe that oil prices will continue to remain high, or even go up over the long term, so solar becomes a more viable technology.

And that, of course, is the main point. A ton of capital is being thrown at companies that produce alternative energy technology.



Having read that entire article now, do you want to know what else happened just before their stock prices tripled? They CUT research. They are doing less research now, but making more money. That tripled their stock prices.

No one invests in a company to do research, they invest in a company to make money.

I guess no one realized oil prices were soaring before May 8th? Or do you think maybe, just MAYBE their profit report has something to do with it? You're deliberately closing your eyes here Corth, the writing is on the wall in bright, shiny letters. The company YOU put forth as an example of how the free market funds research was in fact funded by government funds, and didn't really get any meaningful stock market gains until they cut research and turned a profit. Even though you're right about people speculating the company will be more profitable because of high oil prices, we've known oil was rising for YEARS and NO ONE was funding the research necessary to bring about this company's profitable products EXCEPT the government.

The free market failed, it only appears to be working because the government propped it up... and even then only because of the current economic distress and concerns over oil. Just like with the electric car, the market did not work ahead of time to prevent problems today. It waits until a problem shows itself and then reacts.

Exactly how you would never, ever run your own life. Right?
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Re: Oil and what really scares me

Postby Corth » Wed Jun 25, 2008 7:32 pm

Believe what you want to believe Sarvis. There is a reason that all of this money is being allocated to alt-energy companies.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 8:24 pm

To alt-energy companies that cut their research budgets and are showing profits, that is.

Keep those eyes closed though! Nevermind that they got a bunch of research money from the government to get where they are today. Anything the government does is bad, right?

Still trying to figure out how a company which got funding from the government but didn't get anything from the stock market until it stopped researching proves that the free market adequately funds research, though. Seems, in fact, to fund a lack of research.
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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 10:36 pm

Corth wrote:Teflor,

If the refineries have sufficient supply, as you suggest, then the 'rights holders' of the oil are up shit creek. The day will come that they have to either sell the oil to a refinery, which presumably isn't willing to pay very much since it has a sufficient supply, or take physical delivery of however many thousands of barrels of oil they own the rights to. That doesn't really happen very often does it? Not many commodity investors actually take spot delivery. What good would a few thousand barrels of oil do for me or you? Not very much.


Corth, I'm saying the rights holders are _going_ to be up shit creek for a short while. Oil is a bubble, but in the commodities market, when bubbles pop, they pop quickly.

Especially since many of the rights holders do not actually take delivery of any of the actual commodities.
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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 10:42 pm

Sarvis wrote:Having read that entire article now, do you want to know what else happened just before their stock prices tripled? They CUT research. They are doing less research now, but making more money. That tripled their stock prices.


Corelation != Causation

Sarvis wrote:No one invests in a company to do research, they invest in a company to make money.


HGSI

Sarvis wrote:I guess no one realized oil prices were soaring before May 8th? Or do you think maybe, just MAYBE their profit report has something to do with it? You're deliberately closing your eyes here Corth, the writing is on the wall in bright, shiny letters. The company YOU put forth as an example of how the free market funds research was in fact funded by government funds, and didn't really get any meaningful stock market gains until they cut research and turned a profit. Even though you're right about people speculating the company will be more profitable because of high oil prices, we've known oil was rising for YEARS and NO ONE was funding the research necessary to bring about this company's profitable products EXCEPT the government.


You don't really understand how business works, do you? Stock price means very little for a company's budget unless it's releasing shares to be sold.

You're furthermore misinterpreting and misaligning one anecodote. Private money still funded the research for this company. Investors still bought the shares.

Now that the research is done, they want more of them. It's not exactly a surprise, and it's still more than what the Federal Government throws into it.
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Re: Oil and what really scares me

Postby Sarvis » Wed Jun 25, 2008 10:49 pm

teflor the ranger wrote:
Corelation != Causation


Breaking my rule because seeing that response to absolutely everything has gotten tireseome.

Response: (correlation != causation) != (correlation -> !Causation)
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Re: Oil and what really scares me

Postby teflor the ranger » Wed Jun 25, 2008 10:59 pm

Sarvis wrote:Response: (correlation != causation) != (correlation -> !Causation)


It's too bad for you, that I've never made that assumption, where you HAVE made the initial assumption.

As an aside: R&D by American biotech and pharma industries reached $58.8 billion last year, while the entire 2007 budget of the National Institutes of Health reaches $28.5 billion.
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Re: Oil and what really scares me

Postby Lathander » Thu Jun 26, 2008 1:31 am

Let's make this real easy.

If you run a company, or even if you are just an individual, you do things based on future expectations, not present conditions. If you believe you can make more money in the future AND that rate of return is higher than doing nothing, you spend to invest in capital equipment or research. Now put yourself in the oil companies' shoes. The liberal politicians are talking about taking your profits past a certain level from you. Those same politicians are talking about taking away your tax incentives to explore and produce more oil. Also, most people expect oil prices to go down, at least in the short term (a good example of this is the "contango" price situation we are in right now).

Now, in this environment, why would you invest more when you will most likely make less, especially if you expect popular pressure will force the government to open up exploration areas with lower costs than those that currently exist? Answer, you wouldn't. You would go into rundown mode until the financial environment became better to invest in your company. Instead, you'd invest in the hot stuff like alternative energy. BP is a good example of an oil company putting cash into other forms of energy generation such as wind.

While I'm at it, why is no one talking about windfall profit taxes on other commodities? Gold, copper, steel, corn, beef and just about every commodity is at record or near record highes. I don't hear anyone saying that farmers should be hit with windfall taxes.
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Re: Oil and what really scares me

Postby teflor the ranger » Thu Jun 26, 2008 1:54 am

Lathander wrote:While I'm at it, why is no one talking about windfall profit taxes on other commodities? Gold, copper, steel, corn, beef and just about every commodity is at record or near record highes. I don't hear anyone saying that farmers should be hit with windfall taxes.


Why, Lathander, that's because hitting farmers with taxes is neither trendy nor hip. You see, you have to focus on the issues that are in movies and TV, because that's what the big bucks lobbyists want you to pay attention to like 'global warming' or how the best health care system in the world is the worst.
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Re: Oil and what really scares me

Postby avak » Thu Jun 26, 2008 8:05 am

Gas could fall to $2 if Congress acts, analysts say
Limiting speculation would push prices to fundamental level, lawmakers told

http://www.marketwatch.com/news/story/g ... aspx?guid={2673C102-68E0-41D9-9C9A-10EE2E723948}&dist=msr_13

not sure why this link wouldn't format properly...sorry
Last edited by avak on Thu Jun 26, 2008 2:04 pm, edited 1 time in total.
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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 1:59 pm

Someone needs to explain to me how speculation in the oil market has any impact at all on the end price. The only entities that ultimately take spot delivery of the oil are the refineries. All that the speculators are doing are making bets on what the refineries will be willing to pay once the contract reaches its delivery date. The refineries are not competing against the speculators, they are competing against each other. So how does speculation impact the price the refineries pay? I don't see it at all.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 2:03 pm

Another way of putting it is that there is a certain quantity of oil out there, and there are a certain number of refineries. If there is more oil than the refineries need, then the owners of the oil (speculators), will have to lower prices until the refineries agree to buy their oil, or the owners will have to actually take delivery of the oil.. and trust me, they don't want that at all. If there is less oil than the refineries need, then the refineries compete with each other for the scarce resource, and end up paying the owners of the oil more and the price goes up.

Edit: I'm honestly trying to figure out how speculation can impact oil prices. I certainly acknowledge that a lot of respectable people believe that it has an impact. But just looking at the mechanics of the market, I don't see exactly how it would.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Vikaz » Thu Jun 26, 2008 3:23 pm

Corth wrote:I'm honestly trying to figure out how speculation can impact oil prices. I certainly acknowledge that a lot of respectable people believe that it has an impact. But just looking at the mechanics of the market, I don't see exactly how it would.


If people keep telling you, "Corth, I'm pretty sure you could charge way more for your services, and I'm willing to bet my money that that's true." Woudn't you at least consider it? Wouldn't you tell your client, "You know what, I think I'm not charging you enough for this service I'm providing you, lets try to work something out."

You don't go to a lawyer because you want to go, you usually go because you NEED to go. Same thing with oil, you dont WANT to buy it a $4.00/gal, but you need to buy it anyway.
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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 3:47 pm

Thank you captain obvious! Now put your considerable analytical skills to work on explaining to me how speculation can have any impact on the end price of oil. Remember, if there is too much oil, then the price has to come down because refineries don't need it. If there is too little oil, refineries will be competing with each other for it. How does speculation alter that dynamic?
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Botef » Thu Jun 26, 2008 4:27 pm

Speculative purchasing can also create inflationary pressure, causing particular prices to increase above their true value (real value - adjusted for inflation) simply because the speculative purchasing artificially increases the demand. Speculative selling can also have the opposite effect, causing prices to artificially decrease below their true value in a similar fashion. In various situations, price rises due to speculative purchasing cause further speculative purchasing in the hope that the price will continue to rise. This creates a positive feedback loop in which prices rise dramatically above the underlying value or worth of the items. This is known as an economic bubble. Such a period of increasing speculative purchasing is typically followed by one of speculative selling in which the price falls significantly, in extreme cases this may lead to crashes. Overall, the participation of speculators in financial markets tends to be accompanied by significant increase in short-term market volatility. This is not necessarily a bad thing, as heightened level of volatility implies that the market will be able to correct perceived mispricings more rapidly and in a more drastic manner.


OK, pork belly prices
have been dropping all morning.

So everybody's waiting for them
to hit rock bottom so they can buy cheap.

The people with
pork belly contracts are thinking,

"Hey, we're losing all our money
and Christmas is coming.

"I won't be able to buy my
son the GI Joe with the Kung Fu grip.

"And my wife won't make love to me
cos I ain't got no money."

They're panicking, screaming, "Sell, sell."

They don't want to lose all their money.
They are panicking right now. I can feel it.

Look at them.

He's right, Mortimer, my God, look at it.
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Re: Oil and what really scares me

Postby Sarvis » Thu Jun 26, 2008 5:06 pm

Corth, when lots of people buy stocks the stock price goes up right? Why would oil be any different? Who cares that no one is going to take delivery, when you actually look at the "books" X amount of oil has already been sold. It's probably not easy to tell if it was bought by a speculator or another oil company, there is only whatever amount is listed as unsold.

Besides, as oil prices have risen oil companies have made more money. They have no desire to see past the speculator factor.
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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 5:10 pm

Heres the thing though.. the speculation in oil is NOT increasing the real demand for the oil itself (artificially or otherwise). The speculators are not refineries, which are the only entities with any use for oil. Speculators are buying contracts which are essentially claims to a certain amount of oil. Ultimately, on the day the contract ends, that oil has to be sold to a refinery, or the speculator would have to take delivery, which never happens. It would seem at that point that the final price would be determined by the intersection between the amount of oil ready to be delivered, and the amount of oil needed by the refineries. Unless a lot of refineries are being built (they aren't), I don't see how real demand for oil changes as a result of speculation.

Here is another way of looking at it. When you are an oil speculator you are gambling on what the price of oil will be when your contract expires. If I buy a contract, someone else is selling it and making the reverse bet. So, lets say that I buy a contract that expires on August 1, 2008 for $140.00 per barrel. I am willing to pay $140 per barrel for a claim on that oil in August. It would seem to me that I am making a bet that the supply/demand situation with regard to amount of oil out there verses amount of oil needed by refineries, will justify an increase in the price paid by the refineries in August. If I am right, I make a profit. If I am wrong, I lose money. But still, it seems to me that the actual value of the oil is set by the supply/demand situation at the time when spot delivery is made. Those who are saying speculation impacts the price of oil are saying that people buying contracts now which expire in August are setting the price for August. I'm saying that they are making a bet on what the price in August will be.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 5:22 pm

http://www.econbrowser.com/archives/200 ... ubble.html

Here is a guy who is addressing my point and trying to show that speculation impacts the ultimate price of oil. He properly identifies the issue with regard to refineries being the only consumers of crude oil. I still don't see how he concludes that speculation is having any impact at all (he says its having some, but not a lot).
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Sarvis » Thu Jun 26, 2008 5:29 pm

Corth wrote:Heres the thing though.. the speculation in oil is NOT increasing the real demand for the oil itself (artificially or otherwise). The speculators are not refineries, which are the only entities with any use for oil. Speculators are buying contracts which are essentially claims to a certain amount of oil. Ultimately, on the day the contract ends, that oil has to be sold to a refinery, or the speculator would have to take delivery, which never happens. It would seem at that point that the final price would be determined by the intersection between the amount of oil ready to be delivered, and the amount of oil needed by the refineries. Unless a lot of refineries are being built (they aren't), I don't see how real demand for oil changes as a result of speculation.

Here is another way of looking at it. When you are an oil speculator you are gambling on what the price of oil will be when your contract expires. If I buy a contract, someone else is selling it and making the reverse bet. So, lets say that I buy a contract that expires on August 1, 2008 for $140.00 per barrel. I am willing to pay $140 per barrel for a claim on that oil in August. It would seem to me that I am making a bet that the supply/demand situation with regard to amount of oil out there verses amount of oil needed by refineries, will justify an increase in the price paid by the refineries in August. If I am right, I make a profit. If I am wrong, I lose money. But still, it seems to me that the actual value of the oil is set by the supply/demand situation at the time when spot delivery is made. Those who are saying speculation impacts the price of oil are saying that people buying contracts now which expire in August are setting the price for August. I'm saying that they are making a bet on what the price in August will be.


Ok Corth, but a lot of people are doing it. So the refinery buys oil at the August price when the guy sells his oil, but there are 50 other people buying up oil starting in August to sell it again 6 months later. The "available" supply is still lowered, right?
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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 5:32 pm

One final way of saying the same thing. My take on it is that speculators are simply making bets amongst each other on what refineries will pay for oil in the coming months. Essentially, that refineries lead, and speculators follow. To say that the speculation itself is impacting oil prices, is to assume that the refineries, who are the end users of the oil, are following the lead of the speculators in forming prices. I just don't buy that. The speculators are completely at the mercy of the refineries. The market forces them to sell to the refineries. So really the price of the oil at spot delivery comes down to competition between the refineries for the actual oil that is going to be delivered. If there is excess real oil, the price goes down. If there is a shortage of real oil, the price goes up. But its set at the spot delivery point by the demand requirements of the refineries verses the supply of oil that is ready to be delivered.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 5:35 pm

No Sarvis, the actual real supply of oil has nothing to do with speculation. There is only so much oil being produced regardless of how many speculators get involved. And likewise, there is only so much oil needed. And all of the oil, ultimately, must be delivered at some point to a refinery. The speculators are essentially middlemen. They own claims to the oil for a period of time before the oil has to be delivered. It seems to me that the speculators are trying to anticipate how much refineries will be willing to pay for oil in future months and betting accordingly. If they think that refineries will pay less in August, they sell. If they think refineries will pay more in August, they buy. But its the refinery that is leading, not the speculator.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Vikaz » Thu Jun 26, 2008 5:42 pm

I'm an Industrial Engineer/Software Developer, not an Economist. If I could answer that question, I'd be making a lot more of money than what I am now.

I don't see why it has to be more complicated than what I stated above tho. If the refinery can pass on the cost of purchasing crude to the customer, why would they care how much they buy it at? They're still going to make a profit. If the free market is encouraging them to do so, why would they not try it?

For shits and giggles, here's another captain obvious moment:

I buy from you oranges and sell orange juice. And god damn, it is the most delicious orange juice you've ever tasted. I buy a sack of oranges from you at 10 bucks, and after its all said and done, I make 10 bucks profit from my delicious orange juice sales.

Now comes in this guy, and tells you that he's pretty sure that I will buy the sack of oranges at 20 bucks, but before he tells you that, he buys 1000 sacks from you at 10. Because I think I can still sell this omg-I'm-going-to-come-thats-how-delicious-it-is orange juice it to people and maintain my ROI, I say fine, I'll buy your sack of oranges at 20 bucks, and still make 20 bucks profit.

That guy notices that I'm buying sacks of oranges at 20 bucks from you, and he tells me he's willing to sell me his orange stash for 19 bucks. Good for him, he just made a bunch of money (and fucked my clients in the process, but why do I care, theyre still buying it).

His stash is depleted, and you already know that I will still buy the oranges at 20 bucks a sack, whats your incentive to push the price of the oranges down? I'm making more money and keeping my ROI, you're only increasing the price of your oranges, so your ROI goes up. We should be kissing Mr. Speculator's ass.

Not once did you sell me more or less oranges, and its irrelevant if you have 1 acre or 100 acres of orange trees. I sold the same amount of juice. We're now just charging more for it.
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Re: Oil and what really scares me

Postby Corth » Thu Jun 26, 2008 5:49 pm

Vikaz,

The problem is that the refineries cannot necessarily pass on the cost of the oil to the consumer. Thats why refinery companies are not doing nearly as well as oil producers right now.

Refineries want to buy oil cheap, and sell gasoline (and other refined products) expensive. The difference between these prices is called the 'crack spread'. Oil can be expensive, but if people drive fewer miles, demand for the refined product, gasoline, which is what the refinery is selling, goes down. Best case scenario for a refinery is when there is insufficient refinery capacity overall, and a glut of oil. Cost of refined products go up, and the feedstock, oil, goes down.

http://en.wikipedia.org/wiki/Crack_spread
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Oil and what really scares me

Postby Vikaz » Thu Jun 26, 2008 6:01 pm

Corth wrote:The problem is that the refineries cannot necessarily pass on the cost of the oil to the consumer. Thats why refinery companies are not doing nearly as well as oil producers right now.


Maybe their ROI is down, but they're definitely passing MOST of the cost to the customer. As its been said, the moment they realize that they can get a better ROI from doing planB than from selling gas, they will stop selling as much gas and start investing on making planB a viable solution (which I guess is where we are now?). Just hope that planB isn't stop selling gas and put the money on a 6% bond, cause were going to be fucked for a while if thats the case.
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Re: Oil and what really scares me

Postby avak » Fri Jun 27, 2008 4:55 pm

I've been doing a little research because corth's question made me realize I didn't understand the system the way I thought I did. There is a lot of information floating around about commodity speculation and oil, but you have to search pretty thoroughly for good stuff.

I thought this article about speculation was particularly good and I'll probably post more if I find anything decent.

http://www.clusterstock.com/2008/5/oil_is_a_classic_bubble_detached_from_reality_like_houses_dotcoms_and_tulip_bulbs

But oil is the commodity that really matters and surely the latest jump in prices proves that demand really does exceed supply? Not at all. In the late stages of financial bubbles, it is quite normal for prices to become completely detached from economic fundamentals.
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Re: Oil and what really scares me

Postby Botef » Fri Jun 27, 2008 5:15 pm

Great article Avak, thanks for sharing.
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Re: Oil and what really scares me

Postby Corth » Fri Jun 27, 2008 5:28 pm

I'm not sure if the article, again, addresses the actual nuts and bolts mechanics of how speculation impacts prices in the commodity market.

For instance.. the article says that a lot of oil is sitting in tankers because there is actually a glut. Thats a very expensive proposition. Day rates on large tankers, based on memory, is something like 50k per day. I can't imagine they would want oil to sit in tankers for a prolonged period of time. Why isn't that oil being sold.. perhaps a few bucks cheaper than the going rate? It doesn't add up to me. If there is excess supply, the refiners would be having a field day forcing the price down.

there are few buyers for physical oil cargoes at today's prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year.


See.. thats the crux of what I don't get. If there aren't many buyers for oil at today's prices, then today's prices (the spot price) should be LOW. The speculators, as the article alludes to, are the ones who own pieces of paper linked to the future price of oil. But ultimately, it would seem to me, the spot price.. the end price, should be determined strictly by the amount of physical oil out there, and the demand amongst refiners. Again, I would submit that the speculators are simply gambling on what the refiners are going to do months or years in advance. Refiners leading, speculators following. To say that the speculators are impacting the price that the refiners pay is to say the speculators lead, and the refiners follow. But that concept doesn't make sense to me.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
avak
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Re: Oil and what really scares me

Postby avak » Fri Jun 27, 2008 6:40 pm

Well, first of all, this is pretty interesting and I certainly don't claim to have any great insight here. Kind of working through it like it seems a lot of people are.

My guess is that the effect that the futures market is having on spot market prices is psychological only. Just like the housing bubble. The price of a home is only loosely based on the price of construction; the rest of the formula is essentially intangible. Those intangible factors always include real supply/demand conditions, but often include perceived supply/demand conditions. When you sell your house, you say, 'what are the houses around me selling for?' The housing bubble manifest itself on the idea that additional risk was warranted due to ever rising prices.

So, attacking the problem by suggesting that refiners should be operating in a perfectly logical supply/demand spot market is misleading I think.

Refiners are buying oil at inflated prices because the futures market is telling them that the price is just going to continue to rise. Oil producers are holding oil (I read that costs $1.50 -$4.00 per gallon/per year) to capitalize on the futures market projections. Speculators are putting more and more money in to the futures market because it just keeps working. That, in my opinion, is the vicious cycle.
ssar
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Re: Oil and what really scares me

Postby ssar » Sat Jun 28, 2008 2:29 pm

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