The Price of Gas - Page 3

Xandufar · #21 (**permalink**) 05-30-2008, 06:45 PM

Quote:

Originally Posted by liveforadream

Let's imagine a scenario. You discover a pristine and healthy underground stream of water. You decide to bottle the water and sell them on the market since Americans are crazy about healthy aquifer. It cost you very little to produce it, so the bottles you sell on the market are pure profit.

However, one day, your local people begin to find out about the underground stream of water, and now they also want to bottle the water and sell it to the market. Since it cost them very little to produce, so they compete based on price. Now there are 10 people selling the water, and the price of a bottle of water crumbled to be equal to the marginal cost of producing an additional water.

As you can see, you made a lot of money initially when there was only you selling the water; but the profit declined proportionally to the increase of people selling the identical product and eventually it'd fall to the marginal cost of production if there are a lot of sellers. The only way you could sustain your high profit was to prohibit new comer(s), that way you can charge higher prices.

That scenario reflects one fundamental principle in economics, the most important factor determining profit is scarcity. In plain language, if you are the only game in town or close to it, hell yeah, you'll be reaping cash all over. However if other people could enter the market quite freely, then you might make a lot of money due to some sudden circumstances, but gradually, more people will notice the high price and jump on board and push the price down, subsequently the reduced profit.

Now, going back to the problem with speculators. If as you've said, hedge funds, pension funds, and investment banks etc are the speculators who are making a lot of profits, then they must have had some very good information and made a bunch of money out of it (just like the first guy who discover the underground stream of water). However, to sustain that high profit, we must determine whether the market for investing is competitive or not (in another word, is it easy for new investor to jump on board)? Correct me if I'm wrong, but the capital market is in my opinion quite competitive, I can just go online with as much as a few thousands bucks and jump on the bandwagon, forcing the profit down. Overall, yes those established speculators might have made a lot of money, maybe because they had better information then we do about the market but it's almost impossible for them to maintain that high rate of profit for long.

How about the oil and gas firms? Since, it's not easy for a new firm to enter the market (there are quite a few people who could muster at least a few billion dollars to start a new oil drill or to build an oil refinery), so they have scarcity. But is it enough of a scarcity to maintain a substantially high profit? Again, we have to consider how many oil or oil refiner firms are there. Again, please correct me if I'm wrong, I looked up in wikipedia and there are quite a few (more than ten) oil and oil refinery firms. These firms have some scarcity, but not that much to charge substantially high price since the market is fairly competitive.

Let's imagine a scenario in which thieves find loopholes in the law and use those loopholes to swindle consumers. Wait a minute! I don't have to image that. It "allegedly" happened!

http://www.cnbc.com/id/24886139/for/cnbc/

Quote:

The underlying driving cause of high oil price of today, in my opinion, is demand-shock rather than supply-shock like in the 70s or rampant speculation. The demand for oil has rapidly and steadily increased, outstripping the production capacity, driving the oil and gas price higher and higher. Again, it's easy to point fingers and blaming other people such as China or India or speculators or the OPEC, but I think the biggest culprit to blame here is ourselves, Americans, with our excessive consumption with little awareness of conservation.

"The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum."

http://www.senate.gov/~levin/newsroo...pec.062606.pdf

liveforadream · #22 (**permalink**) 05-31-2008, 09:16 AM

Quote:

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market.

It really does not matter who owns the oil; the price of oil is determined by the supply of the oil and the demand of the oil in general. Buying up oil in future contract does not change that.

For example; If I know that water is going to be scarce in the near future, I buy up a few lakes around the towns hoping I can charge high price in the future. And events turn out to be just like I predicted, and now there is a scarcity of water.

Realizing this, I want to charge a high price on my water because I bought up many water reserves. However, as I priced my water very high; some water seller on the next town realizing that the price is too much higher than the cost and decide to charge a little lower than my price - he would still make profit. Therefore, I have to lower my price, pushing my competitors lowering their price, eventually equal to the (marginal) cost of production.

Again, it is not that easy to escape the invisible hand unless you can bought everything and establish yourself as the sole seller or very close to it (scarcity). Otherwise, the high profit will deteriorate due to competition. And again, the gas market in America is fairly competitive.

Quote:

Let's imagine a scenario in which thieves find loopholes in the law and use those loopholes to swindle consumers. Wait a minute! I don't have to image that. It "allegedly" happened!

There's a story. There is a woman, who is the most famous cooker in her small village. She got a lot of orders since her neighbors now have a lot of work in a newly built factory. Realizing that using dirty coal is much cheaper, she switched to using it. Without her knowing, the smoke of coal causes her son's collapsed lung and his death. Now, she screams and goes around the village hunting for the culprits of her son's death.

Aren't we that woman? Always overlooking our fault and blaming on other people?

Xandufar · #23 (**permalink**) 06-01-2008, 06:08 AM

Quote:

Originally Posted by liveforadream

It really does not matter who owns the oil; the price of oil is determined by the supply of the oil and the demand of the oil in general. Buying up oil in future contract does not change that.

For example; If I know that water is going to be scarce in the near future, I buy up a few lakes around the towns hoping I can charge high price in the future.

Here is the crucial flaw in your metaphor. Oil speculators do not buy physical oil. They buy "paper oil"--oil futures contracts that are settled in cash before delivery of the product.

Quote:

And events turn out to be just like I predicted, and now there is a scarcity of water.

Realizing this, I want to charge a high price on my water because I bought up many water reserves. However, as I priced my water very high; some water seller on the next town realizing that the price is too much higher than the cost and decide to charge a little lower than my price - he would still make profit. Therefore, I have to lower my price, pushing my competitors lowering their price, eventually equal to the (marginal) cost of production.

You're contradicting congressional findings, and attempting to support your contradiction with a metaphor that does reflect the dynamics of speculation in the real world. Read again:

"The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum."

Note that the trade in oil futures contracts increased 22% last month alone.

http://www.bloomberg.com/apps/news?p...E&refer=energy

Forget about fictitious water sellers reacting to fictitious supply and demand issues. We are talking about oil in the real world. Who would be in a better position to know the real price of oil than the executive of oil companies?

During recent congressional hearings, John Hofmeister, the president of Shell Oil, said the price of a barrel of oil should be between $35 and $65. Other executives disagreed and said it should be as much as $90.

http://www.bloomberg.com/apps/news?p...8rxtrVKc&refer =energy

Here we see that the price of a barrel of oil, at about $130, is 44% higher than a high estimate of $90. What happens if we take the lowest estimate? Well, it's 271% too high.

Any way you look at it, there is never a valid excuse to pay speculators through the nose so they can buy all the gas they want while we screwed at the pump.

Quote:

Again, it is not that easy to escape the invisible hand unless you can bought everything and establish yourself as the sole seller or very close to it (scarcity). Otherwise, the high profit will deteriorate due to competition. And again, the gas market in America is fairly competitive.

The invisible hand is in your wallet. It may be close to getting chopped off. How is this for competition:

http://www.cftc.gov/newsroom/general...pr5503-08.html

liveforadream · #24 (**permalink**) 06-01-2008, 08:36 AM

I've read what you have written

Quote:

"The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum."

Yes it has increased the demand for oil, but the crucial distinction is it is "short-term" (very short) demand based on speculation. It does not change the demand for oil in a longer term, subsequently the price will be unchanged.

Again, these speculators bought up a large amount of oil, physical or paper. What do they do with these oil? I don't think they'll keep it; most likely they'll resell it to make a profit.So what happened was:

1) They bought the oil, reducing the supply --> higher price
2) Higher price --> they sell the oil, increasing the supply --> lower price

Historically, speculators have been condemned as vultures reaping people off; but in economics, they are a good thing providing essential supply while there is a shortage by buying up things when things are plentiful and people are not conserving (price too cheap) and selling things when things are scarce and needing goods (price too high). Their job is to moderate the extreme fluctuation of the price.

People would not believe that oil was anywhere too cheap, but considering all the costs of getting the oil, protecting its transportation and refining it, retailing it and finally getting it to your car tank, and finally the cost it imposes on everyone else through polution...the price we had paid was not high at all.

DanishDynamite · #25 (**permalink**) 06-01-2008, 12:53 PM

Personally I'm OK with the high price of oil. It makes alternative sources of energy so much more affordable and vastly increases the funds allocated to research into alternative fuels. I just hope alternative sources en masse are found and implemented before the oil price hits really unafordable levels.

Xandufar · #26 (**permalink**) 06-01-2008, 02:55 PM

Quote:

Originally Posted by liveforadream

I've read what you have written

Yes it has increased the demand for oil, but the crucial distinction is it is "short-term" (very short) demand based on speculation. It does not change the demand for oil in a longer term, subsequently the price will be unchanged.

Again, these speculators bought up a large amount of oil, physical or paper. What do they do with these oil? I don't think they'll keep it; most likely they'll resell it to make a profit.So what happened was:

1) They bought the oil, reducing the supply --> higher price
2) Higher price --> they sell the oil, increasing the supply --> lower price

Historically, speculators have been condemned as vultures reaping people off; but in economics, they are a good thing providing essential supply while there is a shortage by buying up things when things are plentiful and people are not conserving (price too cheap) and selling things when things are scarce and needing goods (price too high). Their job is to moderate the extreme fluctuation of the price.

People would not believe that oil was anywhere too cheap, but considering all the costs of getting the oil, protecting its transportation and refining it, retailing it and finally getting it to your car tank, and finally the cost it imposes on everyone else through polution...the price we had paid was not high at all.

I simply disagree. As the Senate investigation pointed out,

"Reports indicate that, in the past couple of years, some speculators have made tens and perhaps hundreds of millions of dollars in profits trading in energy commodities."

With that in mind, I will restate what I wrote on another thread:

Suppose the United States were at war. Not some kind of neo-colonial war way over in Faroffistan, but a real war like WWII. Let's say American civilian lives are being lost en masse, and the survival of the United States is on the line. In such circumstances would we tolerate a pack of speculators parasitizing the energy of our war effort? If we were not acting like cowards preparing to surrender our sacred honor, we'd hang the bloody thieves like the traitorous dogs they are, fuel up our tanks and aircraft, and bomb the entrails out of our enemies.

You are much too tolerant. These speculators have not acted to "moderate the extreme fluctuation of the price." They have committed a crime which way yet prove to be one of the most economically destructive crimes ever committed against the United States. I'm certain the CFTC will make them pay.

liveforadream · #27 (**permalink**) 06-10-2008, 09:14 AM

Quote:

As the Senate investigation pointed out,

In my opinion, they either are just putting on a show or just trying to find a scapegoat to satisfy their constitutes, disregarding the roots of the problems.

Quote:

Suppose the United States were at war. Not some kind of neo-colonial war way over in Faroffistan, but a real war like WWII. Let's say American civilian lives are being lost en masse, and the survival of the United States is on the line. In such circumstances would we tolerate a pack of speculators parasitizing the energy of our war effort? If we were not acting like cowards preparing to surrender our sacred honor, we'd hang the bloody thieves like the traitorous dogs they are, fuel up our tanks and aircraft, and bomb the entrails out of our enemies.

First I just want to say...beefing up the patriotism to justify your action is rather outdated and often, quite frankly, disastrous.

Quote:

You are much too tolerant. These speculators have not acted to "moderate the extreme fluctuation of the price." They have committed a crime which way yet prove to be one of the most economically destructive crimes ever committed against the United States. I'm certain the CFTC will make them pay.

Their action can be deemed a crime if using justice and fairness standard but in no way speculators are the roots of economic destruction. Rather, they are the opposite of it, preventing economic destruction, at least in the short-term if the roots of the problems are solved.

Xandufar · #28 (**permalink**) 07-29-2008, 01:59 PM

Quote:

Originally Posted by Xandufar

I'm certain the CFTC will make them pay.

http://www.cftc.gov/newsroom/enforce...pr5521-08.html

i.beletesri · #29 (**permalink**) 07-29-2008, 09:41 PM

Xandufar,

The price of Oil IS determined by supply and demand.

The fact that there is enough oil at any given moment doesn't change this fact.

It just means You don't understand the REAL issue of Supply and demand in this case.

Previous to the Exploding demand of Chindia, etc OPEC/Saudis could control the price up or down because they had a Large Production surplus.
This is NO longer the case.

The Saudis are pumping at peak production and world demand is within 1% either way- of that number- Not as previously, 10% or 20% under Saudi/Opec capacity.

A strong world economy and continuing explosive growth of Chindia COULD (tho world economies are now slowing, and there is some 'demand destruction' due to high prices, and/so Oil is falling) if it continued Outstrip the producers ability to produce.

This SLIM-to-none surplus (Supply/Demand) Is why the price has gone up and made 'speculation' so effective if unpopular.

'Speculators'/Buyers of Oil futures contracts include such wise UN-'speculators' like Southwest Airlines who did very well buy buying a whole years Worth of protection against the rise in Jet Fuel costs by buying oil futures.
Yes, more than any little Hedge fund.

Nothing nefarious about that.
Nor about investors wanting to protect themselves against the falling and Bush-diluted-deficit-dollar by buying Commodites, which includes Oil among many others. (Copper, wheat, timber, etc)

Nor about who are the main sellers of Oil Futures.. Oil COMPANIES seeking to lock in prices to enable large capital spending projects like Canadian Tar Sands that might be risky if they couldn't lock in a selling price for years out.

There are pure financial speculators in any and every market at any given time.
Those who bought at $145 trying to run it to 200 are now Licking their wounds.
Just as those buying Yahoo in year 2000 at $500 a share are licking their wounds.
While other Speculators in that stock who 'Shorted' it actually provided liquidity and stopped the stock from going yet higher to crazier prices.

Pure speculators don't move the market- fundamentals I described above DO. Speculators long term effect is about Nil.

jp_hart · #30 (**permalink**) 07-30-2008, 07:37 AM

When my wife and I decided to have a second child we ended up with twins, then our fourth came only a year and a half later. We were shocked and overwhelmed at the logistics of having three kids under two years old. One of the first things we did was buy a three seat stroller to get them all around in, and then we realized the problem of transporting the 7 foot long stroller. The only vehicle available to us was a large SUV. At the time gas was relatively cheap so we didn't think much of it. Now we are stuck with a giant Suburban as our family vehicle because we can't afford to replace it, and with the cost of gas near us it costs about 50 cents per mile to drive.

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