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[jimmyjazz]

It's speculation . . . and demand.  And Middle Eastern pricing policies, along with the devalued dollar.

In the past few days, we have seen some interesting news out of the University of Texas system, which pays for all of its capital expenses through gains from a giant fund that primarily exists due to huge West Texas oil holdings.  They are considering a deal in which they contract to sell $1B worth of oil at today's prices.  Now, do we believe the sellers, who clearly think oil has topped, or the buyers, who clearly think that oil is going higher?

Hmmm.


UT selling $1B in oil reserves

[YZ]

jimmyjazz wrote on Sat, 26 July 2008 12:34

It's speculation . . . and demand.  And Middle Eastern pricing policies, along with the devalued dollar. In the past few days, we have seen some interesting news out of the University of Texas system, which pays for all of its capital expenses through gains from a giant fund that primarily exists due to huge West Texas oil holdings.  They are considering a deal in which they contract to sell $1B worth of oil at today's prices.  Now, do we believe the sellers, who clearly think oil has topped, or the buyers, who clearly think that oil is going higher? Hmmm. UT selling $1B in oil reserves

Oh, yes, the devaluation of the dollar does have an impact on the price, in dollars, of crude oil. for each 20% decrease of the dollar quotation there should be a 25% increase of oil price to balance it.

How much did the dollar sink over the last 12 months? I don't have the number here.

From Bloomberg today:

 http://www.bloomberg.com/apps/news?pid=20601009&sid=aIly GcaVmcmo&refer=commodities

excerpt (bold type by me):

Quote:

Crude oil for September delivery gained as much as $1.02, or 0.8 percent, to $126.51 a barrel in electronic trading on the New York Mercantile Exchange. It was at $126.09 a barrel at 1:10 p.m. London time. Yesterday, oil rose $1.05, or 0.8 percent, to settle at $125.49 a barrel. Futures are up 66 percent from a year ago. Oil prices have fallen more than $20 a barrel from a $147.27 record on July 11 on signs of falling demand in the U.S. The amount of petroleum products supplied from refiners dropped for a third week to 19.9 million barrels a day last week, the lowest since January 2007. Crude stockpiles have dropped 7.3 percent in the past 10 weeks. The dollar slipped to $1.5722 against the euro at 10:16 a.m. in London after touching a two-week high yesterday, and to 106.92 yen after reaching its highest in a month yesterday.

Note that they do mention reduction in output from refineries, reduction in oil 'stockpiles' (if it means real physical stock or contracts held I can't say) and variation in exchange rates.

But... oil prices dropped in a couple of weeks about 15%, did any of you see a similar reduction in the price of gas at the pump?

[PaulyD]

It's certainly good news that oil is coming down in price, but you know what my greatest fear is about that? That western nations, the US in particular, will fall asleep again regarding energy.

I've thought if there is a silver lining to skyrocketing oil prices, it's that America would finally put clean, renewable energy at the forefront of our national psyche. Well, let gas drop back under $4.00 a gallon and suddenly everyone is just breathing a sigh of relief and getting ready to pretend everything is OK again. That's still expensive but I think oil companies have succeeded in making it the new psychological benchmark for consumers.

For the sake of the environment, and for the sake of national security, we must not stop pushing for bio-fuels,  solar energy, and ultra-efficient transportation.

I wonder if Mercedes is still planning to be fossil-fuel free by 2015. I sure hope so. My dream is to someday have a garage roof that is a photovoltaic that feeds an outlet in my garage, into which I plug in something like an Aptera.

Cleaner...quieter...

Paul

[YZ]

PaulyD wrote on Wed, 06 August 2008 04:05

It's certainly good news that oil is coming down in price, but you know what my greatest fear is about that? That western nations, the US in particular, will fall asleep again regarding energy. (snip) Paul

This subject demands long-term commitment with no regard for fluctuations along the way; the fact that fossil fuel will run out sooner or later is a given, and if no other acceptable alternatives are available in the near future, the prices of oil derivates will raise again and stay up.

Here we started in the mid-1970s with a federally-funded alternative fuel program which gave birth to the Ethanol-powered car; one basic limitation was that it ran on Ethanol _only_, but that was not a great concern at the time.  Buyers ran to the new cars and car production rose, bringing a double benefit: reduction in oil imports and boost in the domestic car market.

By the mid-1990s, oil prices were low and the public forgot the Ethanol cars, buying new gasoline-powered cars; with low oil prices Ethanol was at a slight disadvantage in cost per traveled distance.

But development did not stop, and the "flex" cars was introduced in the early 2000s, allowing the owner to use whatever combination of the two fuels was more advantageous at the moment, from 100% Ethanol to 100% Gasoline; this had the side benefit of regulating the pump price of both fuels since the consumer could freely choose what to put in the tank at any given moment, controlling a bit the greediness of the suppliers.

Are there better technologies? on paper, yes, a few; none is economically feasible now or in the short term (5 years) for real mass production, either in production costs for the cars or the fuels.

Let us hope that the richer nations actually get to do something and put some money into good research for practical solutions.

[danickstr]

thanks goodness the speck-yoolaturs gave us a scare and got people thinking about alternative fuels.  Let's send them a thank-you card!!!

Who will sign it?  I think I can count on all people who are concerned about the envirnoment.

[Nick Sevilla]

rankus wrote on Thu, 24 July 2008 13:31

We should note that the article states that for every "real" barrel of oil purchased 22 more are purchased "on paper" for speculation... The way I interpret this is the speculators are in fact increasing "demand" artificially by many many fold... So yes, it is supply and demand, but someone is manipulating the appearance of demand for their own gain. Or, I am completely misinterpreting the article?

Speculators, as usual, are driving the "demand" upwards, with their over-purchasing of oil futures.

We should see oil come down to 80- 90 a barrel by end of the year. Unfortunately, no one will chase these speculators.

Cheers

[JDNelson]

danickstr wrote on Wed, 23 July 2008 21:43

while there is no doubt that oil speculators are affecting the price to a degree, the real issue is DEMAND. China and India are each experiencing their own version of prosperity on a titan scale, and they want to enjoy that prosperity by dumping the crappy bike and buying a crappy car.  (no offense, but they are still adjusting to prosperity incrementally). And those cars need lots of gas.  They have over 2 billion people between them, roughly.  We have 350 million.  Guess who is going to set the demand scale for gasoline.   china is now the #2 maker of cars, and selling about a million a MONTH in the country.

The problem is also SUPPLY.  Not as in, "if we drill here in the US there will be more oil in the market".  If we drill here then OPEC will just pump commensurately less from their wells to balance out the world production at their pre-determined levels.  This is not a "free" market.  Never can be as presently configured. OPEC is a cartel.

35 years ago OPEC was producing about 30 million barrels of oil a day.  Today they are producing about 35 million a day.  Demand in the meantime has gone up how much?  In a rational market, supply would increase to match demand.OPEC is dominated by parties who are either disinterested at best in the US of A's welfare, or antagonistic at worst.  Saudis in bed with Al Quaeda.  Chavez in Venezuela.  Their agenda is not just economic, make no mistake about that.

Blame hedge funds if you want but the fundamental structural problem in all of this is OPEC and their refusal to meet legitimate world demand.

[YZ]

JDNelson wrote on Wed, 06 August 2008 18:21

Blame hedge funds if you want but the fundamental structural problem in all of this is OPEC and their refusal to meet legitimate world demand.

1- who says a producer _must_ supply all that the market wants?

And your country also produces oil, why don't you ask Texas to pump immediately all the oil they have underground instead of demanding that other countries do so? meet your own demand and leave OPEC to prey on others.
(BTW, good luck trying to get U.S. oil producers to pump themselves dry when what they want is to get OPEC dry first).

2- Define 'legitimate'.

A single person driving alone 99% of the time a 2.5 ton SUV with a 6 liter V8 when he could have chosen any other type of car while complaining of $4/gal gas when his gas expenses are less than 2% of his salary is more or less 'legitimate' than the guy who drives his old 1-liter econocar (with no AC or power steering) only because using the deficient public transportation of his country would mean an extra hour each way of his daily commute and who pays $8/gal for gas, resulting in an expense of 10% of his salary?

3- why would your country leave so much power in the hands of its enemies by not investing in its own alternative fuels?

Stop blaming third parties and do your part.

[JDNelson]

Yves, I agree completely with your point number three!  Where I think we're talking at cross purposes, is in conflating the laws of economics with other considerations.

Let's think about microphones for example.  If I'm in the business of making microphones and I sell a million of them, but my retailers say "You know, if we had a million more we could sell 'em in a month, easy", what would the laws of economics suggest?  You would increase your production and make double the gross revenue.  

You would be meeting a legitimate (as opposed to a speculative) demand.  'Legitimate' in this context does not mean lending a moral judgement to the transaction.  IOW, you don't ask yourself whether folks really need all of those microphones.

From a strictly economic view it makes little sense for OPEC to artificially constrain world production.  If they extract the resource sooner, they invest the income and it makes them money.  If they don't extract the resource it is a latent equity.  Either way they stand to make money.  There are agendas at work that are not economic, i.e., religious, political, etc. and the "invisible hand" of the market doesn't work to set a rational price for petroleum.

Again, the long term solution is to minimize (impossible and unnecesary to eliminate) our usage and therefore need for oil products by substituting biofuels and electricity, as in plug-in hybrids.

[Jon Hodgson]

JDNelson wrote on Thu, 07 August 2008 16:38

From a strictly economic view it makes little sense for OPEC to artificially constrain world production.  If they extract the resource sooner, they invest the income and it makes them money.

Not if they believe that increased demand in the future combined with reduced supply will increase prices by a higher percentage than any return on investment today would give them. Plus increasing output requires investment, thus reducing the profit per barrel.

Leaving the oil in the ground for now could actually be the best way to invest those potential oil dollars today.

[JDNelson]

OTOH, if the USA, China and India were to pursue meaningful transitions to biofuel/hybrid vehicle fleets, and renewable electrical generation, the strategy you suggest would backfire and the value of OPEC's latent equity would drop greatly.  

[YZ]

Jon Hodgson wrote on Thu, 07 August 2008 13:01

JDNelson wrote on Thu, 07 August 2008 16:38 From a strictly economic view it makes little sense for OPEC to artificially constrain world production.  If they extract the resource sooner, they invest the income and it makes them money. Not if they believe that increased demand in the future combined with reduced supply will increase prices by a higher percentage than any return on investment today would give them. Plus increasing output requires investment, thus reducing the profit per barrel. Leaving the oil in the ground for now could actually be the best way to invest those potential oil dollars today.

YES!  I was about to write that in response to J.D.'s post...  that's why U.S. oil producers aren't boosting their output, they want to dry out the OPEC first and reap huge profits.

Such large corporations work with a lot of thinking towards the long term; they do act to increase immediate profits, but always with a (big) eye towards the future and longevity of the company.

Which also brings other considerations, more on the 'conspiracy theory' vibe:

It may well be that one or more of the Big Chemical companies already has a viable solution, one that would make sense today with oil at $120/bbl...  but they may be waiting to publicize it when oil supplies are nearing extinction or when someone else publicizes another similar solution.

All in order to maximize profit and minimize consumer options.

Do you believe that none of the huge chemical conglomerates have found anything that can replace oil yet?

[YZ]

JDNelson wrote on Thu, 07 August 2008 12:38

Let's think about microphones for example.

Ok, let's see the microphone example in the light of the oil market, with the adjusted perspective to a resource that is finite and cannot be manufactured, only extracted from existing stocks, like oil is:

You found a supply of VF14 tubes in perfect working condition, new in the box; it is yours to do as you please.

The market has a certain idea about the number of available units and has set a price for each.

Only you know exactly how many you've got.

Do you present your numbers to the market and offer the whole stock for sale immediately or do you sell each one individually according to your monetary needs, withholding the information about how many you've got to maximize unit profit?

[YZ]

JDNelson wrote on Thu, 07 August 2008 13:08

OTOH, if the USA, China and India were to pursue meaningful transitions to biofuel/hybrid vehicle fleets, and renewable electrical generation, the strategy you suggest would backfire and the value of OPEC's latent equity would drop greatly.

Taking in consideration the the USA alone consumes about 50% of the world's oil production, it has an unrivaled power to set the market price for oil by adjusting its demand with no help from others.

A 10% drop in oil consumption by the USA would send shockwaves thru OPEC.

Ideally, this should be a result of not only new technologies but also of increased consumer awareness and waste reduction.

And it would make a lot of sense, politically, to offer the solution to other countries in favorable terms; oil demand would drop further and OPEC's power will be greatly diminished, taking down with it quite a few of USA's current enemies.

IMHO cheaper than the hundreds of billions spent in wars, not to mention human losses.

[JDNelson]

YZ wrote on Thu, 07 August 2008 09:59

Only you know exactly how many you've got.

World petroleum reserves aren't a secret.