Oil and what really scares me

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Re: Oil and what really scares me

Postby Lathander » Sun Jun 29, 2008 5:46 am

That's an asinine and offensive picture. Go troll somewhere else.

In regard to speculation, it's always existed. If you read history, you'll see speculation occurring all the time. Another word for speculation is investing. Usually, the "solution" to speculation is much worse than the speculation.

Let's make a simple example. Oil futures are contracts to buy or sell oil at a predetermined price and time in the future. Many industries and businesses use them to create predictable income or expenses in the future. Now here is the important thing! For a market to fuction, you need as many participants as possible. That means you don't just need those that want delivery; you also need those willing to accept risk as a counterparty to a transaction. Without a counterparty, you can't have an exchange of risk. If one were to limit the oil futures market or any futures market to only those who would take physical delivery that market would not fuction as well. It would suffer from liquidity that investors/speculators inject.

Let me give you an example with the contango situation we are in now.
Oil is trading at $140 for the August contract.
Here is a listing of the oil futures contracts
http://www2.barchart.com/dfutpage.asp?s ... K&section=

Now you will notice contango exists out to Jan of 09. After that, the contracts act as they normally do with a downward sloping price curve. Usually, the near month is the highest with the prices going down the farther out you go. This is because any physical commodity requires storage raising the supplies cost and making it less attractive to hold.

Futures' prices do affect the current price to some degree. We see that all the time with stocks, and it is the same with commodities. Remember, the futures contract gives the buyer of the call (right to buy at a certain date and price) the safety of knowing they have a definite supply. A refiner would buy the contract to make sure they have oil to process into gasoline for example. Now, the current price may be lower than the future when it expires. In that case, the refiner would simply buy on the open market at the lower price than their contract. The trouble with that is they don't have a guaranteed supply.

Personally, I do believe there is storage going on in tankers at the moment. First, rates for tankers have been going up because of scarcity. I haven't heard about alot of tankers sinking so they must be somewhere. Second, with the futures contract pricing at the moment, it would make sense to hold the oil for a few months.

Now, the one option I can see is to raise margin requirements for futures contract. Currently for oil, they are in the 5 to 10% range. The trouble is low margin requirements allow those in the market to act as counterparties more easily with less capital. After a short term drop, higher margin requirements for contracts could actually push them higher because you would lose liquidity in the market.

So what's the solution? Well, the politicians are clueless. Dems have absolutely no wish to see oil cheaper as cheap oil ruins the alt energy plays. Republicans are right about more exploration and production in the US, but there is a 5 to 10 year lag on that. In reality, the "problem" will solve itself in the short term. If the price stays high long enough, it will lead to demand destruction as the 70's did. Raising margin requirement modestly or slightly might also help to squeeze out some of the inflation although it would be necessary to reverse if the futures market was not working. In the long term, the answer is more oil and the government needs to implement reasonable policies for energy.
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Re: Oil and what really scares me

Postby Kifle » Sun Jun 29, 2008 3:30 pm

ssar wrote:Image


Well played, sir.
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Re: Oil and what really scares me

Postby teflor the ranger » Sun Jul 06, 2008 4:57 am

Corth,

Simply put, speculators and investors for crude oil add a lot of money into a market for a global commodity. Demand rises without really affecting supply. I'm not sure how else to explain this. The market just got a hot beef injection and it's rolling in dough. This translates simply into higher prices.

Oil investments can be made in actual barrels, reselling rights, or futures. While refineries are the only true users of crude oil at the end of the day, people are so, so happy to be the middle men in a commodity that is seen as being 'hot.' Oil is not always stored on tankers. Sometimes it is just left in the ground.
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Re: Oil and what really scares me

Postby Corth » Sun Jul 06, 2008 11:29 pm

Ok Teflor. Tell me how speculation exactly increases demand. The only entities with ANY demand for oil are refineries. How do speculators actually increase any real demand for the physical oil? They can't. Plain and simple. Sure if the speculators believe that the price of oil will rise in the future, they can bid up the contract price of oil at a future date. But ultimately this oil has to be delivered, and I can't see how the speculators have any impact on real supply or real demand at delivery.

The only argument that makes ANY sense to me so far along those lines is that if the refineries perceive, as a result of the speculation, that prices will be more expensive in August, they may fill up their storage tanks in July. Or perhaps if they perceive that prices may increase in the future, they may hedge against this by locking in prices now for future delivery. This would create a very temporary spike in real demand, which would ultimately cause prices to drop soon thereafter. The oil bull market we have seen in the past several months has been fairly well sustained. To me it seems like pure supply / demand imbalance, not as a result of speculation, but as a result of not enough real oil to meet real demand.
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 » Mon Jul 07, 2008 12:09 am

Corth wrote:The only entities with ANY demand for oil are refineries.


This is simply untrue. The consumers of a specific commodity are rarely ever the only factor in demand for a product. Demand can come from the entire chain of end-products, as well as any interests that want to see the commodity prevented from reaching those refineries.

Furthermore, there is a wide and diversified market of refineries with a multitude of political influences and other factors that affect overall market demand.

Finally, there are investors that are happy to see the oil stay in the ground. This increases the demand for physical oil by demanding that it be left alone. The refineries ARE hedging their investments by purchasing futures in their own commodities.

They can. Plain and simple.
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Re: Oil and what really scares me

Postby Corth » Mon Jul 07, 2008 4:31 am

Teflor wrote:Demand can come from the entire chain of end-products


Yes, there is a separate demand for refined products. Sure, if demand for refined products increases, refineries will operate at increased capacity and thus need more crude oil. This increase in demand among refineries for crude oil will consequentially increase the cost of crude oil itself. This is entirely normal, and does not explain how speculation in oil futures can increase the ultimate price paid by refineries for crude oil. It just represents a true rise in actual end demand for the unrefined product.

I still don't see how speculation in oil futures in any way impacts the supply/demand equation between oil producers and refineries. It still strikes me as simply gambling on what price the refineries will ultimately end up paying as they compete with each other to secure a finite supply of feedstock for their boilers.

I think your implication about interests keeping oil from the market is false. An investor in an oil future might, as you say, hope that there is a shortage (i.e. less oil is removed from the ground). That way, the value of their claim on a specific parcel of oil to be delivered on a specific date in a specific place, increases in value. However, such an individual has no way of effectuating such a shortage. The oil producing companies, on the other hand, could create a shortage if they wanted to. But they have no reason to. They make their money by removing oil from the ground and selling it. If they don't sell oil, they don't make money. Given the multitude of oil suppliers out there, I think the notion that there is a conspiracy amongst them to limit supply is utterly ridiculous.
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 » Mon Jul 07, 2008 4:52 pm

The implication that the oil is being kept from the market as a whole is not what I'm driving at. What I'm specifically trying to state is that there is inter-market competition.

Oil is not being kept from the market as a whole, it is being kept from areas of the market against each other.
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Re: Oil and what really scares me

Postby Corth » Tue Jul 08, 2008 3:54 am

John Hussman, whose opinion I have an enormous amount of respect for, makes an argument that tends to contradict what I have been saying:

John Hussman wrote:It's sometimes suggested that hedge funds, commodity pools and speculators don't actually drive up the price of oil, because they don't actually take delivery of the physical product – instead rolling their futures contracts over indefinitely or until they close out their positions. From an equilibrium standpoint, however, this argument ignores the zero-sum nature of the futures market. Producers have an interest in selling their output forward to lock in a predictable price. Similarly, bona-fide hedgers (such as transportation and industrial companies) have an interest in buying their oil forward so they can plan without concern about future fluctuations.

To the extent that the speculators begin to take one-sided trend-following positions, their purchase of a futures contract crowds out the purchase that a hedger would otherwise be able to make from a producer.

It doesn't matter that the speculator has no intent to take delivery. What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would. You can see this combination of effects in the commitments data, as a tendency for commercials as a group to become net short following significant price increases in oil.

When it comes time for the speculators to roll the contracts forward, they have to sell their existing contracts either to someone who is willing to take delivery, or to a producer who sold the oil forward and can now clear that liability without actually producing the stuff. Given relatively high spot demand and tight supply, these rolling transactions have worked fine to this point, without driving prices lower.

In my view, the problem will emerge a few months from now, as a) economic demand softens further, b) planned production hikes actually emerge, and c) weakening price momentum encourages speculators to close long positions instead of rolling them forward. At that point, I expect that net speculative positions will plunge by 10-15% of open interest and we'll see a sudden glut on the market for spot delivery. It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year.

None of this means that prices can't move even higher over the short term. As I've noted repeatedly, once prices go into a vertical spike, very small changes in the date of the final peak imply significant uncertainty about the ultimate high. Still, I continue to believe that the often extreme cyclicality of commodities has not suddenly become a thing of the past.

[Geek's Rule o' Thumb: When you have to fit a sixth-order polynomial to capture price history because exponential growth is too conservative, you're probably close to a peak.]

In over 25 years in the financial markets, starting at the Chicago Board of Trade, I've heard a lot of talk about holding onto one asset class or another as a “long-term diversification,” and a lot of reasons why this factor or that has permanently changed the investment landscape (I have a Pets.com sock puppet in the office as a reminder of one of those times). Believe me – nothing shakes people out of their “long-term investments” faster than steeply declining prices. In commodity markets in particular, price trends feed on themselves in both directions, so we see pronounced cyclicality, and much more persistent trends – once set in motion – than we typically do in the equity and bond markets. It may be difficult to identify a peak in oil when it occurs, but most likely, the fallout from that peak will be spectacular.


http://www.hussmanfunds.com/wmc/wmc080707.htm
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 » Tue Jul 08, 2008 4:31 am

Here's to "I can't wait for that bubble to pop."
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Re: Oil and what really scares me

Postby Corth » Tue Jul 08, 2008 4:54 am

I don't know Teflor..

I can see the price of oil decreasing significantly in the short term. Particularly because of a worldwide economic slowdown. However, over the longer term, there will be a mismatch between demand for energy and supply. The concept of 'peak oil' coupled with growth in China, India, and elsewhere, will have an enormous impact on energy prices generically. The cost of energy will increase significantly, in all likelihood, for decades.

I expect that in the future there will be a great emphasis on living near where you work or go to school. I wouldn't even be surprised to see public service announcements on TV extolling the virtues of short trips. Its amazing to me how people routinely commute for well more than an hour in each direction. This could only happen in an environment of cheap gasoline. Unfortunately, our infrastructure was built under the assumption that cheap gasoline would be here forever. At some point we will be at a competitive disadvantage to countries, such as those in Europe, which have had expensive gas for a long time and have built their infrastructure according to that model. They will have a much easier adjustment to expensive energy over the long haul.
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 » Tue Jul 08, 2008 10:39 pm

Corth,

I agree with the sentiment, but I also think it depends on how long prices are high. If it is long enough for alternative industries to develop, oil may continue to be an economic fuel for transport well into the future. Certainly, diesel will not be replaced (for use in unusually large vehicles) by electric in the forseeable future (barring massive advances in energy storage/generation).
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Re: Oil and what really scares me

Postby Corth » Wed Jul 09, 2008 2:00 am

Yeah, thats really the problem. Their are some good alternatives for developing electricity but not necessarily for transportation fuel. Perhaps hydrogen at some point.. which costs a lot of electricity to produce. If we can develop a strong nuclear, solar, and wind energy infrastructure then hydrogen may be viable at some point.
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 » Fri Oct 10, 2008 10:59 pm

Corth wrote:I don't know Teflor..

I can see the price of oil decreasing significantly in the short term. Particularly because of a worldwide economic slowdown. However, over the longer term, there will be a mismatch between demand for energy and supply. The concept of 'peak oil' coupled with growth in China, India, and elsewhere, will have an enormous impact on energy prices generically. The cost of energy will increase significantly, in all likelihood, for decades.

I expect that in the future there will be a great emphasis on living near where you work or go to school. I wouldn't even be surprised to see public service announcements on TV extolling the virtues of short trips. Its amazing to me how people routinely commute for well more than an hour in each direction. This could only happen in an environment of cheap gasoline. Unfortunately, our infrastructure was built under the assumption that cheap gasoline would be here forever. At some point we will be at a competitive disadvantage to countries, such as those in Europe, which have had expensive gas for a long time and have built their infrastructure according to that model. They will have a much easier adjustment to expensive energy over the long haul.


http://www.msnbc.msn.com/id/27122331/

The bubble appears to be popping. But to be honest, I wouldn't expect gas to fall far below 3/gal. In fact, I think the oil companies are going to try to stick us to 3/gal for the next year or so.
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Re: Oil and what really scares me

Postby Vaprak » Fri Oct 10, 2008 11:54 pm

teflor the ranger wrote:But to be honest, I wouldn't expect gas to fall far below 3/gal. In fact, I think the oil companies are going to try to stick us to 3/gal for the next year or so.


I just filled up for $2.94 yesterday.
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Re: Oil and what really scares me

Postby Corth » Sat Oct 11, 2008 1:08 am

teflor the ranger wrote:
Corth wrote:I don't know Teflor..

I can see the price of oil decreasing significantly in the short term. Particularly because of a worldwide economic slowdown. However, over the longer term, there will be a mismatch between demand for energy and supply. The concept of 'peak oil' coupled with growth in China, India, and elsewhere, will have an enormous impact on energy prices generically. The cost of energy will increase significantly, in all likelihood, for decades.

I expect that in the future there will be a great emphasis on living near where you work or go to school. I wouldn't even be surprised to see public service announcements on TV extolling the virtues of short trips. Its amazing to me how people routinely commute for well more than an hour in each direction. This could only happen in an environment of cheap gasoline. Unfortunately, our infrastructure was built under the assumption that cheap gasoline would be here forever. At some point we will be at a competitive disadvantage to countries, such as those in Europe, which have had expensive gas for a long time and have built their infrastructure according to that model. They will have a much easier adjustment to expensive energy over the long haul.


http://www.msnbc.msn.com/id/27122331/

The bubble appears to be popping. But to be honest, I wouldn't expect gas to fall far below 3/gal. In fact, I think the oil companies are going to try to stick us to 3/gal for the next year or so.


Thats approximately something that Sarvis might say. It assumes that the 'oil companies' (or substitute 'big oil') has any control over the price of oil.

Fortunately, the price of oil is determined by supply and demand. As I predicted in that passage you quoted, a slowing worldwide economy has decreased the demand for oil. Consequentially, the price has dropped. There was never a 'bubble' in oil, and I expect the price to make substantially larger highs in the not so distant future.
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 Ambar » Sat Oct 11, 2008 2:10 pm

Corth was exactly right here and with the housing market / loaning agency statements he made , what 2 years ago, maybe more?

Supply and demand .. Right now we're used to cutting back our driving for the most part, supply goes down so do prices .. as we get used to lower gas prices again, prices will go up .. not rocket science here.
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Re: Oil and what really scares me

Postby Sarvis » Sat Oct 11, 2008 3:11 pm

You know, one day I was driving to a Tai Chi class and got stuck at a stop light. While waiting I noticed two gas stations side by side, a Mobil and a Sunoco. The Mobil had a huge line, people actually waiting for the next pump.

Meanwhile the Sunoco's gas was substantially cheaper, though I don't remember the exact number.

The point here: Things don't necessarily compete on price, so there's really no reason to expect that we're getting the lowest possible price through competition.
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Re: Oil and what really scares me

Postby Corth » Sat Oct 11, 2008 4:16 pm

Sarvis,

Why do you suppose people were lining up and waiting to pay more money for the first gas station rather than go to the cheaper one next door?
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 » Sat Oct 11, 2008 8:54 pm

Corth wrote:Sarvis,

Why do you suppose people were lining up and waiting to pay more money for the first gas station rather than go to the cheaper one next door?


*shrug* Beats the hell out of me.

Not the point anyway, the point was that the oil companies aren't competing just on price.
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Re: Oil and what really scares me

Postby Corth » Sat Oct 11, 2008 9:23 pm

You mean the gas stations aren't competing just on price. I agree that this is possible. They could be competing, for instance, on service.

I'm trying to figure out why people lined up and waited for gas at one station so they could pay more than the empty gas station next door. You have no ideas?

I could imagine, for instance, that the first station is full service and the second one is self serve. Or, for instance, if the gas stations were across the street from one another and there was more traffic on the side of the street with the first one. Or perhaps the first gas station sells food and cigarettes and the second doesn't. But two otherwise identical gas stations on the same side of the street with one more expensive and crowded, and the other cheaper and empty.. that doesn't compute for me.
Last edited by Corth on Sat Oct 11, 2008 9:27 pm, edited 1 time in total.
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Re: Oil and what really scares me

Postby Sarvis » Sat Oct 11, 2008 9:27 pm

Corth wrote:You mean the gas stations aren't competing just on price.

I'm trying to figure out why people lined up and waited for gas at one station so they could pay more than the empty gas station next door. You have no ideas?



The gas station can't set the price lower than the oil company lets them, Mobil apparently doesn't feel the need to compete on price.

And no, I didn't stop to interview everyone who was waiting.
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Re: Oil and what really scares me

Postby Corth » Sat Oct 11, 2008 9:29 pm

You need to show me some proof that an independently owned gas franchise retailer cannot price the gasoline below what some oil company tells them. Especially since, for instance, the mobil gas station does not necessarily even gets it refined product from a mobil refinery.
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 » Sat Oct 11, 2008 11:08 pm

Corth wrote:You need to show me some proof that an independently owned gas franchise retailer cannot price the gasoline below what some oil company tells them. Especially since, for instance, the mobil gas station does not necessarily even gets it refined product from a mobil refinery.


How about you find me some proof that they do price their gas below what the oil company sells it to them at?

I know they make most of their money on snacks inside the store, but I doubt they sell their main product at a loss when 90% of their customers just pay at the pump and drive off.
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 12:25 am

The oil producing company doesn't sell gasoline to gas stations. Try again. The answer is in this thread.
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 Vaprak » Sun Oct 12, 2008 12:55 am

Some states (Maryland for example) have laws barring gas stations for selling fuel for less than cost. However, as evidenced by this article, Iowa does not have any such laws: http://www.ketv.com/news/17622431/detail.html

Quote from the article:
"Sinnott said he doesn't make money from gas sales, only when people come into his store to buy things. He said he's losing money on gas sales right now because he's selling it for a lower price than he paid for it."


It also doesn't appear to be any problem selling for a loss in Texas: http://www.star-telegram.com/news/story/966925.html
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 2:13 am

Corth wrote:The oil producing company doesn't sell gasoline to gas stations. Try again. The answer is in this thread.


Really Corth, just say what you're thinking. I'm not rereading the entire thread and to attempt to guess what the hell you're talking about.

Frankly, I think you have a LOT of faith in a system you don't understand and can't possibly understand because you'll never actually see the inner workings.

You just have this happy assumption that people will bid themselves under the other guy to get more customers. Why do you think they'd do that? If they did, Sunoco wouldn't have had a substantially lower price than Mobil that day when buying the same product, refined from a raw material sold at the same market price to all companies involved.


<b>Vaprak</b>: So then why run a gas station at all? You could run a convenience store in the same location and not lose money to 90% of your customers.

Do you see how it doesn't make sense?


EDIT: Oh, and as for your articles: A one day event and a pissing match don't general policy make. It does tell me how much these guys are normally making on gas though, if they can afford to throw away money for a few days!
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Re: Oil and what really scares me

Postby Ragorn » Sun Oct 12, 2008 3:05 am

We've pretty much shown that we, as a country, are unable to stem our demand for gasoline no matter what the price. Gas has tripled in the last five years and we've cut demand what, 10%? If that?

Oil prices may drop, and gas prices will drop with them. But when oil was $80 on the way up, we were paying $2.65 a gallon. Now that it's $80 on the way down, we're still paying $3.25 around here.
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Re: Oil and what really scares me

Postby Kifle » Sun Oct 12, 2008 4:50 am

Gas prices are impacted by much more than the price per barrel, Rags. I think Corth wrote a post about it a while back... something to do with speculation. But I'm drunk and lazy right now, so I'm not going to think too hard on it or try to look it up.

As far as Sarvis' empirical observation -- there are probably more confounders in the situation than even Corth speculated on. I can think of a few, and intro economic books will tell you a few others. Point being, a microcosm will not debunk supply and demand theories.
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 5:12 am

Kifle wrote:Gas prices are impacted by much more than the price per barrel, Rags. I think Corth wrote a post about it a while back... something to do with speculation. But I'm drunk and lazy right now, so I'm not going to think too hard on it or try to look it up.


He definitely didn't blame it on speculation. ;)

As far as Sarvis' empirical observation -- there are probably more confounders in the situation than even Corth speculated on. I can think of a few, and intro economic books will tell you a few others. Point being, a microcosm will not debunk supply and demand theories.



Yes, there probably are a lot more "confounders" than any of us understand... which make it highly unlikely that such a simple principle as supply & demand has the effects you'd like to believe.
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Re: Oil and what really scares me

Postby Kifle » Sun Oct 12, 2008 4:55 pm

Sarvis, I'm just saying: supply and demand work as a very plain economic principle. Over the long-term, you will easily see the effects of supply and demand working on the market. It is a good universal principle that explains things. It's just like Newtonian physics. While it may not explain everything, and it certainly isn't the end-all-be-all of theoretical assumptions in the field, it is practical, it works, and it is easy to use and understand. And, hell, do you think kids could handle the bending of space-time instead of "an apply falls towards huge lumps of mass" explanations? Anyway, as an economic principle, supply and demand are the same. They explain behavior in a very simplistic manner, and the effects can be seen on the large scale very easily. Sure, it wont explain minute changes here and there, but this is where other concepts come in to play -- such as collusion, speculation, stock prices, etc. In your instance, you would have to think about other things that economics tries to explain as well: positioning of store (would it be hard to merge with traffic again by going to the opposite side of the highway?), other products in the store, assholes own the other store, etc. These are confounders and, without them (such as physics experiments in a vaccuum), you would see supply and demand work; or, in this case, you would see people paying less for the same product.

It's the same as the Wal-mart anomoly: Why do people avoid Wal-mart's low prices? Because people hate Wal-mart and don't mind paying 10c more per product.
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 6:57 pm

Kifle wrote:Sarvis, I'm just saying: supply and demand work as a very plain economic principle. Over the long-term, you will easily see the effects of supply and demand working on the market. It is a good universal principle that explains things. It's just like Newtonian physics. While it may not explain everything, and it certainly isn't the end-all-be-all of theoretical assumptions in the field, it is practical, it works, and it is easy to use and understand. And, hell, do you think kids could handle the bending of space-time instead of "an apply falls towards huge lumps of mass" explanations? Anyway, as an economic principle, supply and demand are the same. They explain behavior in a very simplistic manner, and the effects can be seen on the large scale very easily. Sure, it wont explain minute changes here and there, but this is where other concepts come in to play -- such as collusion, speculation, stock prices, etc. In your instance, you would have to think about other things that economics tries to explain as well: positioning of store (would it be hard to merge with traffic again by going to the opposite side of the highway?), other products in the store, assholes own the other store, etc. These are confounders and, without them (such as physics experiments in a vaccuum), you would see supply and demand work; or, in this case, you would see people paying less for the same product.

It's the same as the Wal-mart anomoly: Why do people avoid Wal-mart's low prices? Because people hate Wal-mart and don't mind paying 10c more per product.


So basically, all of Libertarian philosophy is based on a "dumbed down for children" explanation of economics?

Somehow that's highly unsurprising.

Keep in mind how this started: Teffie said gas prices wouldn't go down because oil companies would "stick us" with over $3/gallon. Corth replied basically stating supply & demand would dictate the price.

I'm only saying that much more goes into the price, and that oil companies likely will keep the price higher than it could be. Ragorn's post collaborates that, with gas being at a higher price than it was last time oil was at the same price.

The simplification of pricing into supply & demand may be a useful way to teach things to kids, but it isn't useful for discussing economic policy any more than assuming a vaccuum will let you build an airplane.
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Re: Oil and what really scares me

Postby Ragorn » Sun Oct 12, 2008 7:06 pm

Kifle wrote:Gas prices are impacted by much more than the price per barrel, Rags. I think Corth wrote a post about it a while back... something to do with speculation. But I'm drunk and lazy right now, so I'm not going to think too hard on it or try to look it up.

Nobody is speculating right now. The opposite... it's a huge exodus.
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 7:24 pm

I'm seeing gasoline in my neck of the woods at about $3.20 a gallon, which is what i would expect more or less with $85 per barrel oil. Keep in mind that gasoline is a refined product. Refineries buy oil from the oil producers, and turn it into gasoline and other refined products. Typically they run at 100% capacity during the summer because of increased gasoline demand, and then they often shut down for periods of time in the fall for maintenance. That could actually justify a situation where you have a glut of oil and a shortage of gasoline. I don't think thats the case right now, but I use that to illustrate how the price of oil and gasoline can differ. As I said before, I think gasoline at $3.20 is just about normal for $85.00 oil.
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 7:27 pm

Here's a question for those of you who think the oil companies actually have any say in the price of their product. How come they were getting hammered for all those years in the 90's and early part of this decade? I remember not too long ago paying less than a buck a gallon for gasoline. Why didn't the oil companies do something about that if it was within their power?
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 7:54 pm

Corth wrote:I'm seeing gasoline in my neck of the woods at about $3.20 a gallon, which is what i would expect more or less with $85 per barrel oil. Keep in mind that gasoline is a refined product. Refineries buy oil from the oil producers, and turn it into gasoline and other refined products. Typically they run at 100% capacity during the summer because of increased gasoline demand, and then they often shut down for periods of time in the fall for maintenance. That could actually justify a situation where you have a glut of oil and a shortage of gasoline. I don't think thats the case right now, but I use that to illustrate how the price of oil and gasoline can differ. As I said before, I think gasoline at $3.20 is just about normal for $85.00 oil.


Sure it's "normal." Just like last time it was at $85/barrel...

*looks at Ragorn's post*

Oh...


Random thought: Why do plants shut down for maintenance anyway? I mean, do other industries have this problem? Do GI Joe toys fluctuate in price during spring because the plants were running at full capacity for Christmas?
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 7:58 pm

Corth wrote:Here's a question for those of you who think the oil companies actually have any say in the price of their product. How come they were getting hammered for all those years in the 90's and early part of this decade? I remember not too long ago paying less than a buck a gallon for gasoline. Why didn't the oil companies do something about that if it was within their power?



Ever hear of "testing the limits." Generally it's applied to kids, but the principle likely applies here as well. Maybe they didn't think people would pay more for gas, then they had to raise it and found out they would.

See, the thing is... the price never goes back down to where it was. It just goes up, then comes back down to some level above what it used to be under the same conditions. So sure, the plants are under maintenance now. Do you think we'll have gas under $3/gallon this winter? This spring?

Doubt it, because we'll keep paying $3.15 and be happy we're not paying 4 anymore.

You run a business Corth. Do you habitually offer your services for less than you think people are willing to pay?
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 10:13 pm

I get paid as much as I can. Likewise, the oil companies do the same. However, we are talking about a commodity. The market determines the value of the oil, not the producer. Currently we're at about $85 per barrel. I'm sure the 'big oil' companies would love it if they could get $150 a barrel.. but thats not exactly within their control.

As far as your 'testing the limits' theory.. its assanine. Its not like the oil company says.. ok we just raised our prices to $100 a barrel.. take it or leave it. Its sold at a market at a going rate based upon what the consumers of oil (refineries, not individuals.. you keep forgetting that) are willing to pay.

Sarvis, given your conspiracy theory of how business works, explain to me why they even bothered to bring gasoline down to $3.20 per gallon? Why not leave it at $4.00 or maybe even increase it to $5.00?
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Re: Oil and what really scares me

Postby Sarvis » Sun Oct 12, 2008 10:50 pm

Corth wrote:I get paid as much as I can. Likewise, the oil companies do the same. However, we are talking about a commodity. The market determines the value of the oil, not the producer. Currently we're at about $85 per barrel. I'm sure the 'big oil' companies would love it if they could get $150 a barrel.. but thats not exactly within their control.

As far as your 'testing the limits' theory.. its assanine. Its not like the oil company says.. ok we just raised our prices to $100 a barrel.. take it or leave it. Its sold at a market at a going rate based upon what the consumers of oil (refineries, not individuals.. you keep forgetting that) are willing to pay.

Sarvis, given your conspiracy theory of how business works, explain to me why they even bothered to bring gasoline down to $3.20 per gallon? Why not leave it at $4.00 or maybe even increase it to $5.00?


Funny that you keep asking me to explain things when you never answer my questions Corth.

So again: Why is it only down to $3.20 now? If demand fell off due to high prices, it should go down to where it was last time demand was at this level.

It hasn't.

You said yourself you'd get the highest price you can. Maybe this IS the highest price they can get right now. We've already established that competition doesn't necessarily drive prices lower, as there are other things people can compete on. Vaprak posted links of people losing money on gas sales at $2.85/gallon... so clearly the oil companies are selling gas at a higher rate than they were last time oil was at $85/barrel. What's the discrepancy here, Corth? Plant maintenance that doesn't affect any other industry, or that somehow wasn't being done last fall?

Waiting to hear the explanation.

As for why it went down at all, people expect it to. Gas prices are SUPPOSED to go up in the summer due to "high demand" and then go down as the travel season stops. It's expected. You'll catch less flak if you mirror a cycle, even as you shun it.

But it's cute you think I'm a conspiracy theorist, considering I never said anything about collusion. I pointed out quite clearly earlier that the gas stations aren't competing based on price... and if you don't compete on price there's no reason to lower your price below the other guys. No conspiracy here at all. Thanks for trying, though!
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Re: Oil and what really scares me

Postby Ragorn » Sun Oct 12, 2008 11:13 pm

Corth wrote:Here's a question for those of you who think the oil companies actually have any say in the price of their product. How come they were getting hammered for all those years in the 90's and early part of this decade? I remember not too long ago paying less than a buck a gallon for gasoline. Why didn't the oil companies do something about that if it was within their power?


I'd say the answer is competition. No one gas company could increase the price substantially, or they would have been priced out of the market. What the industry lacked was a single influence that would allow all providers to raise their price substantially all the same time. In the case of the 90s, if gas companies intentionally colluded to raise prices, they would have violated our anti-trust laws.

But war in an oil producing country? Bingo.

Once Exxon and Shell had a reason to begin increasing the price ceiling on gas, they went far beyond what was necessary and reasonable. Or would you say it's normal that a huge spike in the price of a commodity (in this case, oil) results in world-record profits for companies that purchase, refine, and sell it? Wouldn't you say it's normally the opposite?
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 11:22 pm

Ok, first lets recognize that both oil and gas prices have come down significantly in the past month or so, purely due to market forces without any edict or regulation. That must be amazing to you Sarvis.

Second, looking at historical price data, the last time oil was priced approximately the same as it is now was early October 2007. The nationwide gasoline price then was $2.75. Today it is $3.17. So lets recognize a difference in gasoline prices despite the fact that oil is the same price.

Third, lets recognize the point I made earlier in this thread that while oil and gasoline prices are certainly related, there are other factors which can make them diverge to some extent. Like, for instance, if refinery capacity is limited you can have a situation where there is a glut of oil and a shortage of gasoline. Lets also recognize that significant amounts of refinery capacity came offline due to hurricane Ike last month, and it takes about a week or so to get the boilers going again. There were gasoline shortages in the southern states for weeks as a result, and this is just working itself out right now. Read this article from last month. The point here is that there are two separate markets at issue, oil and gasoline, and while they are related since gasoline is made out of oil, there are other things that influence the price of gasoline besides the price of oil.

Fourth, I think there is some validity to your point that prices go up faster than they come down. The gas stations set the price of gasoline (not the oil producers or refineries). Its an EXTREMELY competitive industry, often with several gas stations on a single internsection competiting against each other, mostly on price. They are very quick to raise prices when their own costs go up, and of course reluctant to lower prices when their costs go down. However, due to competition, the prices do come down, albeit, I will admit, a bit slower than they went up, since the gas stations are trying NOT to lower prices. Notwithstanding this reluctance, note that gasoline prices are down to $3.17 per gallon when they were significantly more expensive just a few weeks ago. Purely based on market forces. If oil prices stay where they are currently, chances are there will be further downward pressure on gasoline prices.

Fifth, its important to emphasize that oil prices have literally collapsed over the course of just a few weeks. This goes towards the last point. Gasoline prices have come down quite a bit in just a few weeks, but its not unusual to expect that it would take some extra time for them to come down to where you should expect them to end up. In October, 2007 when oil was around the same price as now, it was not nearly as volatile a market as the current one. Oil had been making a slow run up, with gasoline also making small incremental price increases. Now oil is like half the price of what it was a month ago, and it does take just a little bit of time for retail gasoline prices to come down also via competition.
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Re: Oil and what really scares me

Postby Corth » Sun Oct 12, 2008 11:30 pm

Ragorn wrote:
Corth wrote:Here's a question for those of you who think the oil companies actually have any say in the price of their product. How come they were getting hammered for all those years in the 90's and early part of this decade? I remember not too long ago paying less than a buck a gallon for gasoline. Why didn't the oil companies do something about that if it was within their power?


I'd say the answer is competition. No one gas company could increase the price substantially, or they would have been priced out of the market. What the industry lacked was a single influence that would allow all providers to raise their price substantially all the same time. In the case of the 90s, if gas companies intentionally colluded to raise prices, they would have violated our anti-trust laws.

But war in an oil producing country? Bingo.

Once Exxon and Shell had a reason to begin increasing the price ceiling on gas, they went far beyond what was necessary and reasonable. Or would you say it's normal that a huge spike in the price of a commodity (in this case, oil) results in world-record profits for companies that purchase, refine, and sell it? Wouldn't you say it's normally the opposite?


So how come oil prices have collapsed in just a few weeks?

Just like Sarvis' posts, your posts reflects a lack of understanding of how markets work, and specifically, the relationship in this case between oil producers, oil refiners, oil distributors, and gas stations.

Of course a spike in the price of a commodity will result in tremendous profits for the company that produces it. It costs $X per barrel to take oil out of the ground regardless of how much Exxon-Mobil can sell it for. The more they can sell it for, the more money they make.

On the other hand, high oil prices have not been helpful at all to refiners, who make their money based on the spread between what they pay for oil and what they can sell their gasoline for. Their best environment is one where there is plenty of supply of oil, and tremendous demand for gasoline. Until recently it was the exact opposite. Low supply of oil, and diminishing demand for gasoline.

I'm not sure how the Iraq war, which impacts exactly one fairly insignificant oil producing source, implies that there is somehow monopoly control over oil production. There are literally hundreds of independent corporate producers of oil, along with dozens of sovereign producers, all of whom are competing with each other for all intents and purposes. Its not like we're talking about microsoft here. We're talking about a commodity which is everywhere and under the control of hundreds of different entities.
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Re: Oil and what really scares me

Postby Sarvis » Mon Oct 13, 2008 12:37 am

Corth, stop for a second. You're acting like Teffie (hey, if you can compare me to him I can return the favor) and just arguing for the sake of argument. He claimed that oil/gas companies would stick us with a price of over $3/gallon for a while longer and you went off arguing about S&D. NOW you're arguing that mysterious "other factors" play a part... which is EXACTLY what I was saying. You blame hurricanes and refinery capacity, and that's fine if you want to believe that. I guess there were no hurricanes or need for maintenance last year right?

The point is much more goes into the price than S&D, and you're still arguing against me for saying that even though you just said it yourself.
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Re: Oil and what really scares me

Postby Corth » Mon Oct 13, 2008 12:47 am

Whats mysterious about the factors that go into the price of gasoline? Certainly the price of oil is the biggest factor. But refinery capacity is a very large factor as well. Lets not forget distribution. You are talking about two different products here. Oil and Gasoline. You can have all the oil in the world, but if refineries are offline, as many were for weeks following hurricane Ike, you will not be producing gasoline at peak capacity and there will be a shortage.

All of these factors influence supply of gasoline, which is one half of the equation that will always determine its ultimate price.

Moreover, I agreed with you to some extent that prices tend to rise faster than they come down all other things being equal. I wouldn't say that I am arguing for the sake of arguing.

I am talking about basic economic and market theory here. Stuff that isn't even debated between economists. If anything, you are the one who is trying to argue for the sake of arguing when you try to say that a basic law of economics that has been governing the value of things from before recorded history does not exist.
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Re: Oil and what really scares me

Postby Corth » Mon Oct 13, 2008 12:52 am

By the way, Sarvis, did you even read the article I linked? Here's one of the more relevent quotes:

A few refineries, including an ExxonMobil facility in Beaumont, Tex., suffered flooding from Hurricane Ike and will not be fully repaired for at least several weeks. Oil analysts said they expected the gasoline shortages in much of the Southeast to improve gradually through Columbus Day.


This article was about 2 weeks ago.. so right there we have proof that refinery capacity is diminished (and thus less gasoline is being produced). That probably accounts for a very large part of the discrepency between gasoline prices now and gasoline prices in October 2007 when oil was priced the same.
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Re: Oil and what really scares me

Postby Sarvis » Mon Oct 13, 2008 1:05 am

Corth wrote:If anything, you are the one who is trying to argue for the sake of arguing when you try to say that a basic law of economics that has been governing the value of things from before recorded history does not exist.


See Corth, here's your problem: I never said that.
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Re: Oil and what really scares me

Postby avak » Mon Oct 13, 2008 1:08 am

Yes, it is true that the underlying driver is ultimately supply and demand. I think you guys are going to argue in circles for eternity over this. One side emphasizing basic fundamentals of markets; the other side is emphasizing the additional 'cofounders' (cool word btw) in the market. Maybe a case of both mostly right?

Anyway, food for thought:

Oil prices plunged below $85 a barrel yesterday, the lowest level in a year, as Opec, the oil exporting countries' cartel, called an emergency meeting to discuss reducing its crude production to halt the collapse in prices.


http://www.ft.com/cms/s/0/fc297918-9664-11dd-9dce-000077b07658.html

So, imo, perfect example of both sides of this argument. OPEC essentially dominates the supply, which is a gray area in terms of normal capitalistic expectations.

I think we should start a 'laissez faire versus regulation' thread!

Speaking of which, msm media is starting to cry socialism over the bailout!
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Re: Oil and what really scares me

Postby Ragorn » Mon Oct 13, 2008 1:49 pm

Corth wrote:Second, looking at historical price data, the last time oil was priced approximately the same as it is now was early October 2007. The nationwide gasoline price then was $2.75. Today it is $3.17. So lets recognize a difference in gasoline prices despite the fact that oil is the same price.

Oh, that's interesting. My area pretty much followed the national average on the way up (VA has relatively low gas taxes compared to the northeast, where my family lives). However, gas is still $3.40 and above for the cheap stuff most places here. Interestingly, there's a huge variance between Exxon/Mobil and independent stores. I found a Citgo selling at $3.14 the other day, and there's a Racetrak Gas that advertises $3.09 (but they're out in the sticks, where they won't drive competition for the big chains).

Fourth, I think there is some validity to your point that prices go up faster than they come down. The gas stations set the price of gasoline (not the oil producers or refineries). Its an EXTREMELY competitive industry, often with several gas stations on a single internsection competiting against each other, mostly on price. They are very quick to raise prices when their own costs go up, and of course reluctant to lower prices when their costs go down. However, due to competition, the prices do come down, albeit, I will admit, a bit slower than they went up, since the gas stations are trying NOT to lower prices. Notwithstanding this reluctance, note that gasoline prices are down to $3.17 per gallon when they were significantly more expensive just a few weeks ago. Purely based on market forces. If oil prices stay where they are currently, chances are there will be further downward pressure on gasoline prices.

I think we're in complete agreement. Prices ARE coming down, just slower than they went up, and there's a much bigger delta between the price of oil and the price of gas than there was on the way up. Maybe that's due to Ike, maybe it's due to reluctance.

I'm not really even sure what the argument is here anymore. Sarvis... what exactly is the underlying point that you're trying to drive at?
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Re: Oil and what really scares me

Postby amena wolfsnarl » Mon Oct 13, 2008 3:46 pm

One thing about the cost of gas being set by supply and demand is that OPEC knowingly tries to help manipulate this. just a few weeks ago the cost of oil was dropping and so they announced that they would be cutting oil production to try and prevent the cost of oil dropping. Sure oil is about cost and demand but when you have the largest oil producing alliance in the world trying to help keep that price high it goes beyond supply and demand
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Re: Oil and what really scares me

Postby Corth » Mon Oct 13, 2008 4:18 pm

I wouldn't say it goes 'beyond supply and demand' Amena. Opec is 100% all about supply and demand. Its an attempt to circumvent the normal incentives of the free market by creating an artificial shortage of oil. It attempts to increase the price of oil it sells by limiting supply.

However, I don't think the affect is as pronounced as a lot of people give it credit for for three reasons.

First, historically Opec has had a very difficult time enforcing its quotas against member nations. Its a classic 'prisoner's dillema'. The net benefit to all the members is greatest if they keep production down. On the other hand, any one individual member can increase its own benefit by ignoring these quotas, and they very often do so.

Second, while opec represents a significant portion of world oil production (about 35%), it by no means has the market cornered. If Opec were to decrease production, the increase in price would be a great incentive for other oil producers to ramp up their production.

Third, there is a built in constraint in how far Opec can extort the rest of the world. If oil prices increase to a high enough level the market begins to create incentives for people to use less oil. Thus, for instance you see sales of SUV's drop to very low levels, while they can't even produce enough Hybrids. Plug in electric cars such as the Chevy Volt become viable. Steps are taken to promote the long-awaited hydrogen economy. For this reason, its actually incumbent upon Opec to keep prices high, but not too high. That is why you often see them increasing production when prices get to a certain level.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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

Postby Sarvis » Mon Oct 13, 2008 4:41 pm

Corth wrote: For this reason, its actually incumbent upon Opec to keep prices high, but not too high.


Corth wrote:Sarvis, given your conspiracy theory of how business works, explain to me why they even bothered to bring gasoline down to $3.20 per gallon? Why not leave it at $4.00 or maybe even increase it to $5.00?


Uh-huh.

Why is it Libertarians can never go more than a few posts in a thread without some kind of self-contradiction?
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