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2007-2008 Crude Oil Cost


Pumapayam

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I was reading a theory this morning that the culprit isn't the price of oil - it is the weakness of the dollar in which oil prices are denominated. In "real" terms, whatever they might be, the value of oil is still somewhat stable, only we are paying for it with dollars that are rapidly depreciating. Inflation in oil and other commodities is in a way the fee we are paying producers for collecting dollars and funding US deficits. I'm no economist, but it makes some sense.

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I was reading a theory this morning that the culprit isn't the price of oil - it is the weakness of the dollar in which oil prices are denominated. In "real" terms, whatever they might be, the value of oil is still somewhat stable, only we are paying for it with dollars that are rapidly depreciating. Inflation in oil and other commodities is in a way the fee we are paying producers for collecting dollars and funding US deficits. I'm no economist, but it makes some sense.

euro_dollar_black_cherry_2.png

yes--a number of actual economists see it that way. And at least one illustrator. ......

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I was reading a theory this morning that the culprit isn't the price of oil - it is the weakness of the dollar in which oil prices are denominated. In "real" terms, whatever they might be, the value of oil is still somewhat stable, only we are paying for it with dollars that are rapidly depreciating. Inflation in oil and other commodities is in a way the fee we are paying producers for collecting dollars and funding US deficits. I'm no economist, but it makes some sense.

BINGO! We have a winner, someone who gets it. I'm sure Niche will wade in with the $30 answer, but Subdudes two cents put it all in a nutshell. Way to go Copper........

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A simple analysis:

I currently commute 48 miles round trip (lets call it 50).

I drive a Toyota Camry V6 and generally get about 26 mpg (yes, I'm a dork and I check at each fill-up). Let's call it 25 mpg.

We'll assume 250 work days a year (52*5 minus 10 holidays/other days off).

Now let's assume I buy a place ITL where my round trip commute is now 10 miles. My annual commuting miles have now dropped from 12,500 to just 2,500. That's 10,000 fewer miles, and more importantly, 400 fewer gallons of gasoline.

So my gasoline savings has only netted me an extra $2,000 a year even at $5.00 per gallon. Even assuming the 50.5-cent per mile IRS reimbursement as a true total cost, I've only saved $5,050 a year.

Now, $5,050 a year isn't chump change, but it doesn't nearly begin to cover the increase in housing cost when moving from the Burbs to ITL.

A few flaws in the argument. One, not only is the work commute longer, but everyday errands are longer, as well. When I moved from the Woodlands (29 mile commute) to Houston, my annual mileage dropped from 21,000 to 8,000. When gas increased, I adjusted a bit (not because I had to, but wanted to), and my annual mileage dropped to 6,000. Things are just closer inside the loop. So my gas and wear-and-tear savings were more like $7,500.

Now, to my home. Of the $1300 I pay on the mortgage, $1100 of it is tax deductible. So, the real payment is $1000 per month. Since gas is not deductible, $5 a gallon gasoline costs $6.35 in taxable dollars (27% tax bracket). Additionally, the gas has no equity. Once burned, it is gone. My inner loop home is increasing in value much faster than suburban homes. Not only am I not wasting gas, therefore not contributing to the runup in price, my home investment is increasing. I save money and make money at the same time.

The last thing is cost is relative. While apparently you can afford to blow an extra $400 a month due to your income, most cannot. The worse part is that the quick runup in price wreaks havoc on household budgets. If money is tight and gas cost an extra $100 a month over last year, most families will deal with the budget shortfall by using credit...at least at first. Later, when the price increase seems permanent, other sectors of the economy will suffer, such as movie houses, restaurants, and retail stores. Less revenue means layoffs. So, while I am celebrating the price of my Exxon stock, Best Buy and Chilis are laying off employees.

In the final analysis, there is little one can do but gripe, like they are on this forum. The costs of selling your home to move closer could be $10,000 or more. Selling a gas guzzler at a loss to buy a Corolla also costs money. If one is a renter, fine, move close to work. If one is already in the market for a new ride, great, look for a MINI. But, for everyone else on a budget, the night at the movies gets cut, meaning more time on HAIF complaining about gas prices.

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So a $1.00 in April 2007 when crude was around $62/barrel equals the buying power of $0.54 in April 2008 with crude around $114 a barrel.

WTF!?!?!

I really hope not!

Not quite, but a big chunk of it is. The dollar has dropped nearly 20% in value over the past year.

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Yeah, the slide dollar has been a factor and has especially exacerbated things in this country, but the "real" price (in the economic sense of the term) is still up, too. You can get more Big Macs for a barrel of oil in France these days, too.

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In 1981, the highest ever price for oil, inflation adjusted, was $101/barrel. We are approaching paying a 20% premium (we're headed for $120) on top of the highest ever price for oil. And it's not just a temporary spike. This is going to go on for a while. Inflation is going to eat us alive, eventually.

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Yeah, the slide dollar has been a factor and has especially exacerbated things in this country, but the "real" price (in the economic sense of the term) is still up, too. You can get more Big Macs for a barrel of oil in France these days, too.

I think you are probably right about that. The "real" price has gone probably gone up in every currency, only the dollar weakness makes it especially painful for Americans. I have to say it bothers me how we are importing inflation this way. The article (in FT) makes it sound like higher inflation and interest rates are inevitable.

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Looks like Niche's explanation of price elasticity is starting to sink in. And no, you're not expect to bike from Sugar Land into downtown, but the ultimate economic expectation would be for you to reevaluate your whole choice of living so far from work and either move houses or change jobs to wear you wouldn't have to drive so much. At $1 a gallon, the true cost of a house Sugar Land (or Katy) is probably still less than the price of a house inside the loop. At $3 or $5 that cost is probably closer and it's a tighter decision to make.

Sounds good for the long run! But what about the short run? Keep in mind Niche wants to eliminate METRO.

Also, most of your guesstimations about the "true price" of a house are not based in any reality as far as I can see, or that you can prove.

Well, yeah. If you can't afford the price of a commodity or good, you have to find ways to use less of it. Carpooling uses less gas per person per distance traveled.

An increase in the price of oil increases far more than just the cost of commuting. Did you know this?

Cheap fuel prices are not a right, yet for years this country has been developed in the mindset that supplies will always be pletntiful and prices low. Ergo, the transformation to a new market paradigm has been, is, and is going to continue to be, hard.

Record profits will set us straight. Also, the multi-trillion dollar subsidy in favor of the oil industry, and the 100+ year headstart should clue us in. Most oil companies have been coddled in favor of government intervention in their favor. This is why they make record profits here are nationalized everywhere else.

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A few flaws in the argument.

Which is why I said it is "simple." ;)

One, not only is the work commute longer, but everyday errands are longer, as well.

I guess that just depends on where in the burbs you live. My wife works out of the home. We live almost within earshot of 290. So the new Cypress HEB is very close to our house. The bank is close. Our church is a little far, but most of the trip is on 290 where we get great milage on Sunday morning. I'll admit it's a little far for recreational trips into the city, but having a one-year-old and being natural homebodies tends to limit the frequency of that anyway. So, for me, non-work trips are very close to a wash.

Now, to my home.

I don't have insurance or taxes in escrow, we just write big checks for them in January. My wife and I don't make a ton of money, but we saved our butts off and lived meagerly the first few years of our marriage and we put down about 60% of our purchase price, and we have a 15-year mortgage, so interest isn't high (and therefore we have a much smaller tax deduction). So believe it or not, my note is only about $600 a month.

My inner loop home is increasing in value much faster than suburban homes. Not only am I not wasting gas, therefore not contributing to the runup in price, my home investment is increasing. I save money and make money at the same time.

No kidding your home is going up in value! That initial investment is also a huge barrier to entry. To use your words, while you can apparently afford that on your income, most cannot. What about your property taxes? For a similar home (even a smaller home), my tax bill increases $4500 yearly because of that high property value. And that doesn't have any equity either.

The last thing is cost is relative. While apparently you can afford to blow an extra $400 a month due to your income, most cannot. The worse part is that the quick runup in price wreaks havoc on household budgets. If money is tight and gas cost an extra $100 a month over last year, most families will deal with the budget shortfall by using credit...at least at first. Later, when the price increase seems permanent, other sectors of the economy will suffer, such as movie houses, restaurants, and retail stores. Less revenue means layoffs. So, while I am celebrating the price of my Exxon stock, Best Buy and Chilis are laying off employees.

I never said that the increase in price wasn't making life difficult for people. For some, it can be quite disastrous. I was only stating that the gas price increase alone did not justify a move into the city FOR US. Honestly, I'd LOVE to live closer in. But I'm more pragmatic than emotional and have never been into instant gratification.

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I think you are probably right about that. The "real" price has gone probably gone up in every currency, only the dollar weakness makes it especially painful for Americans. I have to say it bothers me how we are importing inflation this way. The article (in FT) makes it sound like higher inflation and interest rates are inevitable.

Yep. Alan Greenspan's cheap money policy has caused a lot of the devaluation of the dollar. Rates will need to go up to correct for this.

Sounds good for the long run! But what about the short run? Keep in mind Niche wants to eliminate METRO.

Also, most of your guesstimations about the "true price" of a house are not based in any reality as far as I can see, or that you can prove.

There are all kinds of costs that go into choosing a place to live. Not only do you pay the sales price of the house, but you pay taxes (the cost of education is surprisingly consistent - compare private school tuition ITL to property taxes in Spring Branch), you pay the implied cost of time spent sitting in the car on your commute, you pay the cost of gasoline, you pay the "cost" of there being no Cafe Annie or MFA in Katy, etc etc.

Some of it you can enumerate, some of it you can't, but generally speaking if the housing market is perfect all of those costs should be reflected in relative housing prices.

An increase in the price of oil increases far more than just the cost of commuting. Did you know this?

Not quote sure I understand this. So what? Cumulative crude oil demand for oil is more than just gasoline demand in the United States and it's all up these days.

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Of course something had to happen in Nigeria.

Really, what good did this militant group do, are they getting paid to sabatoge the line? Can we send our troops from Iraq to Nigeria now . . .jeez.

Where is the hurricance when you need it, anyone else surprised?

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There's a Shell station just a few blocks from Minute Maid Park. I was desperate and paid $3.46 and I thought that was insane. I'm sure its higher in other places around town.

I was on empty so thats the only reason I put in just about $8.00 and it hardly showed on the meter. :o

We need to start recycling urine or something instead of gasoline. Something's gotta give!

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There's a Shell station just a few blocks from Minute Maid Park. I was desperate and paid $3.46 and I thought that was insane.

Try a Shell station $3.57 for regular unleads, right there on Chimney Rock and 59 South.

I am sure it's even higher today.

They are always ridiculously higher than any other station in Houston.

I don't know why that station does or how they stay in business, there are several cheaper ones a few blocks away, include another Shell station on Westpark that is usually 15 to 20 cents cheaper.

Is Shell like the Evian of gasoline?

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3.61 today at Conoco Phillips on Wycliffe and Memorial for PREMIUM Unleaded. Everywhere else looks to be 20 cents more.

I am understanding that Trader/Brokers/marketers of Oil and Gas products can't get enough credit to make transactions. They are using up what is granted and having to seek more almost weekly. Will this in turn increase prices more?

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I saw a new commercial the other day where this woman goes on about abundant energy alternatives, and that we have more than enough oil right here. Exxon spends 0.4 percent of its budget researching alternative fuel sources.

I guess we'll have to wait to see how the Japanese respond. They are about 2-3 years ahead of GM and Ford in the development cycle.

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I saw a new commercial the other day where this woman goes on about abundant energy alternatives, and that we have more than enough oil right here. Exxon spends 0.4 percent of its budget researching alternative fuel sources.

I guess we'll have to wait to see how the Japanese respond. They are about 2-3 years ahead of GM and Ford in the development cycle.

Now if the government would only push conservation, I'd be happier.

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There are all kinds of costs that go into choosing a place to live. Not only do you pay the sales price of the house, but you pay taxes (the cost of education is surprisingly consistent - compare private school tuition ITL to property taxes in Spring Branch), you pay the implied cost of time spent sitting in the car on your commute, you pay the cost of gasoline, you pay the "cost" of there being no Cafe Annie or MFA in Katy, etc etc.

Yeah I understand that, I was just wondering where you got your $3 and $5 numbers from.

Not quote sure I understand this. So what? Cumulative crude oil demand for oil is more than just gasoline demand in the United States and it's all up these days.

I guess I'm just trying to understand the relationship between oil and the increasing cost of things. Seems like everyone says "oh just move closer in to town" or "learn to carpool" as if commuting is the only thing expensive oil affects.

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BINGO! We have a winner, someone who gets it. I'm sure Niche will wade in with the $30 answer, but Subdudes two cents put it all in a nutshell. Way to go Copper........

I'm too busy to explain it all exhaustively (for which you should probably be thankful). The International Monetary Fund IMF has already done a really good job at it. They also go into food and metals prices. Their forward-looking conclusions are hit-and-miss by my estimation, on account of that they do a poor job analyzing the varied impacts of different kinds of inflation. Their policy recommendations are generally sound, and although I am sorry to see that they brought up global warming policy for any other reason than for mockery's sake, at least they're bringing it up to use as ammunition against biofuels subsidy.

For those of you incapable of understanding economese, the gist of it is:

1) Of added commodity consumption since 2000, developing nations have crowded out first-world nations. It is especially apparent in metals, oil, and food. This is very different from the last energy price bubble; that was supply-driven as a result of OPEC's intervention, this is demand-driven.

2) Biofuels policy in the U.S. and E.U. is having very serious adverse consequences, and even as global demand for food is spiking, there's less to go around. Between 20% and 50% of agricultural feedstocks have been diverted to biofuels production, which only comprises 1.5% of transportation fuel supply. Recent legislation ignores these problems and is compounding the problem. In the mean time, the cost of biofuels (including subsidies) is still relatively high compared to raw gasoline or diesel, and mileage per gallon is lower, so the legislation has only increased the price of transportation fuels.

3) Increasing the amount of capacity for commodity production takes a very long time and an immense capital outlay, but since commodities are so price inelastic and therefore relatively volatile, producers were initially not very confident in the long-term sustainability of the high commodity prices which justify new projects. Futures markets have reflected this lack of confidence, with forward price curves that are consistently declining, oftentimes unreasonably so; this also makes it more difficult for suppliers to negotiate financial hedges so as to lock in high prices before starting a new project. In the mean time, geological and technological issues as well as significant short term limitations on upstream equipment and services mean that a 70% increase in nominal upstream investment from 2004 to 2006 resulted in paltry capacity increases. Because production has not ramped up quickly enough inventories of oil, metals, and food have declined to such low levels as that commodity price speculation has gotten out of hand and resulted in greater volatility.

4) The substitution effect is in play, and in a very big way. As I touched on earlier, biofuels are a big issue. Corn is used as an input for meat, dairy, and poultry, so prices rise. And, for instance, as corn utilizes land that could otherwise be used for soybeans, soybean prices go higher. And if the oils derived from soybeans go up in price, then more non-soybean oils are used, thereby driving up their price. Oil and metal prices obviously affect agricultural costs, but high oil prices also cause a shift to nuclear and coal electricity production, driving prices of all forms of electricity higher.

5) Artificially low interest rates spur greater demand for commodities, and the devaluation of the U.S. Dollar makes the purchase and consumption of commodities such as oil, metals, and grains (most of which are priced in Dollars) more attractive to countries not using or pegged to the Dollar. Economies using the Dollar or pegged to the Dollar often respond by printing money and lowering interest rates, which in the short term bouys demand for commodities. Although the role of speculators in boosting oil prices was brought up, the jury is still out on that. Speculators introduce a number of counter-acting forces and on the whole are probably better to have around than not.

OK, I'm done. Like I said, that was the gist of it. I've added in a little bit from my perspective, but most of this is theirs. Like I said before, I don't have enough time for originality or exhaustiveness.

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Your second point is one I alluded to in a much earlier post in this thread and in the agribusiness/GM food thread. The shortsighted and (IMO) misguided biofeul policy serves as little more than a marketing campaign for oil, another subsidy for agra, and has serious ripple effects throughout the supply chain. We'll be here complaining about gas prices all summer, while our developing neighbors have food riots. In the good ole heirarchy of needs, food still trumps fuel.

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