Why Oil Prices Will Tank

[Subdude]

How much of a part does commodities trading practices have in the inflated price? What do you guys think of this article?

http://planetgore.nationalreview.com/post/...jExYmU0ZjFhNzY=

Also, the decisions by India and Malaysia to decrease their fuel subsidies could have an effect on demand as well.

I'm sorry, but I think it is silly to blame speculation. For every speculator that's making money someone else is losing. Blaming speculators is just one of those easy answers that people fall back on without any particular evidence.

Since much of the "bubble" is due to the weak dollar, it would take a strong dollar to burst it. But, no one will take the politically difficult steps to strengthen it.

Very true. Occasionally the Treasury Secretary or Fed Chairman trot out to announce they are in favor of a strong dollar, but I question how much the markets believe them. Given the level of inflation some tightening will occur and the dollar should strengthen somewhat, but the Fed is unlikely to tighten as aggressively as the ECB and so the dollar will stay somewhat weak in that respect.

[20thStDad]

Who is We?

For the last 20 years all the oil companies have been concerned with is buying other oil companies. They have been keeping their earnings to themselves. Let's see Chevron bought Gulf and then they bought Texaco, but not before pissing Getty and Pennzoil off in the process and sueing each other. Exxon bought Mobil after their tanker sunk in Alaska. Amoco bought Atlantic Richfield only to then be bought themselves by BP. El Paso buys Tennoco. Diamond Shamrock buys Valero. Phillips buys Conoco.

The list goes on. They really accomplished alot with all their earnings over the past 20 years. Couldn't one of them at least build one refinery?

They need to be re-regulated. We need Teddy Rosevelt to come back.

The oil companies aren't making huge profits at the refineries, it's upstream where they net the big bucks. That's why they aren't so willing to invest a huge amount in a new refinery compared to exploration and production. If production levels off or increases slightly, world refining capacity can handle it. You also have to realize how old these refineries are - building one now would have to comply with infinitely more stringent regulations than the last one built (30+ years ago) so the cost probably is not justified by the gains that would come from it.

[TheNiche]

The oil companies aren't making huge profits at the refineries, it's upstream where they net the big bucks. That's why they aren't so willing to invest a huge amount in a new refinery compared to exploration and production. If production levels off or increases slightly, world refining capacity can handle it. You also have to realize how old these refineries are - building one now would have to comply with infinitely more stringent regulations than the last one built (30+ years ago) so the cost probably is not justified by the gains that would come from it.

Correct and correct, but add to that that although no new refineries have been built in decades, refining capacity has been expanded significantly at existing plants.

Refining capacity was a hot-button issue from a few years back, though. It has cooled off, and with good reason. It just isn't as big a contributor to rising energy prices as it had been. That doesn't mean that policy shouldn't be tweaked; refining is a global industry, and we need to remain competitive so as to continue attracting investment. But it also isn't what is responsible for $4.00 gasoline.

I'm sorry, but I think it is silly to blame speculation. For every speculator that's making money someone else is losing. Blaming speculators is just one of those easy answers that people fall back on without any particular evidence.

Speculators take a lot of heat, but they serve a critical function. By attaching a risk premium to commodity prices, they encourage producers to invest in producing more of that commodity and researchers to develop substitutional commodities. In the long term, speculators are the solution to high energy prices, not the cause.

The production of some commodities can be scaled up or down to meet market pricing very quickly--witness the ridiculous shift towards corn production in places like southeast Texas (if you don't believe me, drive to El Campo). But oil and gas infrastructure is incredibly intensive. It takes many years to gear up, and the folks that are really making bank right now are oilfield suppliers, whose equipment is ridiculously scarce and can't be manufactured anywhere near quickly enough to satiate producers' demands.

[RedScare]

According to MasterCard, gas consumption dropped 3.8% last week alone, and 5.2% over the last 4 weeks. Doesn't sound like refining capacity is the problem.

http://www.msnbc.msn.com/id/12400801/

[TJones]

According to MasterCard, gas consumption dropped 3.8% last week alone, and 5.2% over the last 4 weeks. Doesn't sound like refining capacity is the problem.

http://www.msnbc.msn.com/id/12400801/

.......oooooorrrrrrrr perhaps people have smartened up a little bit and have decided NOT to pay 5% to 15% interest per $60 to $100 fill up ? MasterCard can only track purchases made with their credit cards. I am still buying gas, but I damn sure ain't using my credit card for it.

[RedScare]

MasterCard can only track purchases made with their credit cards.

Umm...and debit cards.

[cottonmather0]

Be sure to mark this thread, so that you can remind me of the "collapse".

Note: I put quotes around "collapse", because as I reread the article, he appeared to get increasingly vague about what his definition of "collapse" is. I have a suspicion that his definition of collapse is a lot higher price than what our definition would be.

DING DING DING!

A "correction" is technically defined as a 10% or more drop in the price, which would be... about $14.

And getting to $100 would be a huge drop in price from a technical trading standpoint.

For people who think high prices are a bad thing - and I'm not necessarily one of them - this probably isn't a something they want to hear.

[Jeebus]

While the price of oil may indeed drop, to use the housing and tech stock bubbles as his proof is misleading. Those two bubbles occurred because there was too much of a good thing, not too little. In the case of oil, the only way the price collapses is if we are suddenly flooded with cheaply produced oil, or demand collapses.

In fact, at $200 oil and $6 or $7 dollar gas, I think a worldwide recession actually becomes likely.

Yesterday the NYT had a very eye-opening story on the impact of gas prices in poor rural areas, especially the south and the west, where gas costs as a percentage of income are 3 times more than in urban and suburban areas. For the poor in, for example, the Mississippi delta, it's beginning to make more economic sense to not work and get food stamps or some type of welfare, than spend most of your day's pay to fill up your old clunker truck to drive 50 miles roundtrip to work the fields, which is the only job to be had.

Imagine $7 gas and the impact on the rural poor. Very thought provoking, I thought.

I could see 7 dollar gas virtually stopping the suburban home market. I don't think you'd see much for new subdivisions along lonely stretches of road like we are used to now.

.......oooooorrrrrrrr perhaps people have smartened up a little bit and have decided NOT to pay 5% to 15% interest per $60 to $100 fill up ? MasterCard can only track purchases made with their credit cards. I am still buying gas, but I damn sure ain't using my credit card for it.

Yes, people are just now deciding to not use their debit/credit card, especially at a time when virtually all gas stations are pay at the pump.

[TheNiche]

DING DING DING!

A "correction" is technically defined as a 10% or more drop in the price, which would be... about $14.

And getting to $100 would be a huge drop in price from a technical trading standpoint.

For people who think high prices are a bad thing - and I'm not necessarily one of them - this probably isn't a something they want to hear.

Is "correction" a technical term? And if so, does it apply to the price of everything, anything, and all combinations of anythings? I submit to you that a brightline 10% rule is absurdity. At the very least, there ought to be three variables accounted for: price, volatility, and peak-to-trough delay.

[Jeebus]

I figure OPEC likes the high price, but they don't want it to get so high that it pushes the development of alternatives. They have to find a price that makes everyone delicate flower without actually doing anything to reduce demand.

Its good business. Monopolize a commodity, then sell it at the absolute highest price that will still allow the most purchases. We as Americans delicate flower because we live opulently, and we are spoiled by technology.

That's because any oil we drill HERE, will go to US, not the rest of the world. Mark will confirm, there is lots of oil underneath the U.S. soil, we just can't get to it. We wouldn't need to even think about buying Arab oil for about 100 years before having to think about reserving our surplus. The biggest problem is that China could care less about alternative fuel sources. They will take what is avialble NOW, so their demand has come to be just as great as ours, and now you have a supply and demand equation.

We use 25% of the world's daily oil supply, China only uses about 8%. As for the oil we're standing on, I don't think it's that we can't get to it, I think that its because we have level headed politicians that know better than to drill ours now. If you think about it, we can drill ours now, have $1.00 gasoline for a while, then when once we've used it all up, we'll have to go crawling to the other countries just for a drop of their $50.00 gallon gasoline. Or.. we could just wait until they run out, all the while paying higher prices now, so that when we finally do drill, we will hold the power to sell overpriced to them, and we benefit from it.

[TheNiche]

According to MasterCard, gas consumption dropped 3.8% last week alone, and 5.2% over the last 4 weeks. Doesn't sound like refining capacity is the problem.

http://www.msnbc.msn.com/id/12400801/

TJ is very very wrong, but so are you. Try rereading that article.

[BryanS]

Speculators take a lot of heat, but they serve a critical function. By attaching a risk premium to commodity prices, they encourage producers to invest in producing more of that commodity and researchers to develop substitutional commodities. In the long term, speculators are the solution to high energy prices, not the cause.

Speculation in commodity markets should be illegal. I am thinking felony, 10 years in the slammer as a first offense. Didn't know how pretty the HCJ was, until I saw this:

If you do not have the means to intake, process, and then produce a product based on the raw material you have a contract on (oil, wheat, corn, you name it) - you have ZERO commercial interest at stake. If you have no commercial interest at risk, you should be banned from that market, period. Let the true supply and demand dynamics balance themselves out. Some say that the current price of oil is not due to speculation... others say it is... If it is true market forces working - then so be it. If it's speculation... well... time for a stay at the HCJ (or perhaps the nearest federal prison as we're talking felony here).

The only exception I would make might be gold and silver. Buy as much of that junk as you want, and hope the greater fool buys even higher. But when it comes to our food and energy... that should be off limits (to speculative "investment.")

[TheNiche]

We use 25% of the world's daily oil supply, China only uses about 8%. As for the oil we're standing on, I don't think it's that we can't get to it, I think that its because we have level headed politicians that know better than to drill ours now. If you think about it, we can drill ours now, have $1.00 gasoline for a while, then when once we've used it all up, we'll have to go crawling to the other countries just for a drop of their $50.00 gallon gasoline. Or.. we could just wait until they run out, all the while paying higher prices now, so that when we finally do drill, we will hold the power to sell overpriced to them, and we benefit from it.

It bears comment that although China's total consumption of oil is much less than our own, it is growing at a rate faster than any other country on Earth, by far outpacing our rate of demand growth in both actual and percentage terms. Insofar as oil pricing is being set on the basis of pure supply and demand factors, China's thirst for oil is tremendously impactful.

We use 25% of the world's daily oil supply, China only uses about 8%. As for the oil we're standing on, I don't think it's that we can't get to it, I think that its because we have level headed politicians that know better than to drill ours now. If you think about it, we can drill ours now, have $1.00 gasoline for a while, then when once we've used it all up, we'll have to go crawling to the other countries just for a drop of their $50.00 gallon gasoline. Or.. we could just wait until they run out, all the while paying higher prices now, so that when we finally do drill, we will hold the power to sell overpriced to them, and we benefit from it.

That's far from a sure-fire plan. Above certain price thresholds, oil stops making sense for various uses. Legacy issues prevent us from switching over at a moment's notice to hybrid vehicles, to green housing, to wind energy, and from heating oil to electric heating systems, but in a course of five to ten years, enough people can switch over to permanently reduce consumption of oil, to create economies of scale in non-oil alternatives, and to serve as the impetus for alternative energy research such that the price of oil really does collapse.

And then we're stuck with a a bunch of nearly worthless goo that we should've harvested at the earliest moment at which it made economic sense.

[BryanS]

I could see 7 dollar gas virtually stopping the suburban home market. I don't think you'd see much for new subdivisions along lonely stretches of road like we are used to now.

I also see 7 dollar gas virtually stopping all downtown, inner loop development. Why the hell build the office in DT Houston, when people would rather just work where they live - in an office park, in their cozy suburbs. Energy corridor... Clear Lake/NASA...

[TJones]

Its good business. Monopolize a commodity, then sell it at the absolute highest price that will still allow the most purchases. We as Americans delicate flower because we live opulently, and we are spoiled by technology.

We use 25% of the world's daily oil supply, China only uses about 8%. As for the oil we're standing on, I don't think it's that we can't get to it, I think that its because we have level headed politicians that know better than to drill ours now. If you think about it, we can drill ours now, have $1.00 gasoline for a while, then when once we've used it all up, we'll have to go crawling to the other countries just for a drop of their $50.00 gallon gasoline. Or.. we could just wait until they run out, all the while paying higher prices now, so that when we finally do drill, we will hold the power to sell overpriced to them, and we benefit from it.

Let me get this straight. So, we let our own economy implode first, while we continue to use foriegn oil that isn't going to dry up until the year 8236 if we continue using it at the rate we do today, THEN once our once great country is nothing more than a suburb of China and Venenzuela, we start drilling for ours ? Yep, sounds like a sure fire plan to me. Hey Red, you buy the ammo, I'll bring the guns and we'll reinforce your neighbor's blue shop/house, and become Omega men !!

[RedScare]

I also see 7 dollar gas virtually stopping all downtown, inner loop development. Why the hell build the office in DT Houston, when people would rather just work where they live - in an office park, in their cozy suburbs. Energy corridor... Clear Lake/NASA...

Because if the office is not where you live, you are screwed. Remember, this aint the 50s and 60s, when Dad worked for the same company for 40 years, then retired. Today's employees change jobs...even careers...several times over their working life. In a high priced transportation market, locating your business in a central location that is accessible through mass transit makes the job easier to get to. If you live in Katy, and both Chevron and Anadarko offer you a job, which one are you taking (assuming you aren't itching to sell that house you just bought)?

[TJones]

TJ is very very wrong, but so are you. Try rereading that article.

Niche, MC can't possibly know what the consumer's spending trends are, they can only see what THEIR customer's are using their credit/debit cards for. Even though virtually EVERY pump is a "pay here" I continuosly see lines 3 to 4 deep inside my Cheveron making purchases using CASH. I don't know what the trend is inside the loop, I can only see what is going on in my neck of the woods.

[Trae]

Isn't there suppose to be like two trillion barrels of oil in Colorado? Some in South Dakota, too? We have a ton of supply in the US.

This is when mass transit would be great for all of Houston. Enough of these damn freeway/tollway projects. Get some commuter rail and light rail. It was reported that mass transit usage is up 4%. Light rail is up 10% (the highest).

[RedScare]

Let me get this straight. So, we let our own economy implode first, while we continue to use foriegn oil that isn't going to dry up until the year 8236 if we continue using it at the rate we do today, THEN once our once great country is nothing more than a suburb of China and Venenzuela, we start drilling for ours ? Yep, sounds like a sure fire plan to me. Hey Red, you buy the ammo, I'll bring the guns and we'll reinforce your neighbor's blue shop/house, and become Omega men !!

Don't drag me into it. I agree with Jeebus.

[Trae]

I also see 7 dollar gas virtually stopping all downtown, inner loop development. Why the hell build the office in DT Houston, when people would rather just work where they live - in an office park, in their cozy suburbs. Energy corridor... Clear Lake/NASA...

Or, it could spike up the inner loop housing construction, as there are a ton of offices in the Inner Loop. People already live close to their jobs (generally) on the West side of town. It is the other areas (Pearland, Cypress, etc.), that are just out there.

I mean, if you could live in the loop and be able to ride light rail to your job, that would make life a whole lot easier than driving.

[TheNiche]

Speculation in commodity markets should be illegal. I am thinking felony, 10 years in the slammer as a first offense.

If you do not have the means to intake, process, and then produce a product based on the raw material you have a contact on (oil, wheat, corn, you name it) - you have ZERO commercial interest at stake. If you have no commercial interest at risk, you should be banned from that market, period. Let the true supply and demand dynamics balance themselves out. Some say that the current price of oil is not due to speculation... others say it is... If it is true market forces working - then so be it. If it's speculation... well... time for a stay at the HCJ (or perhaps the nearest federal prison as we're talking felony here).

The only exception I would make might be gold and silver. Buy as much of that junk as you want, and hope the greater fool buys even higher. But when it comes to our food and energy... that should be off limits (to speculative "investment.")

You don't know what you're talking about. I'm going to blow you out of the water right now, very decisively, and then hopefully you'll go read a textbook about financial markets and institutions. If you need a suggestion, I'll gladly provide it to you.

Speculation is an activity, not a kind of person or entity.

The only way to outlaw speculation is for the government to set prices.

There is no one oil price. Price is specific to location and quality.

Eliminate the venue for trading oil in the United States, and trading will continue to occur overseas. And being a global commodity, the U.S. will still be a price-taker on a global market.

Now shoo...go read a textbook.

[TJones]

Don't drag me into it. I agree with Jeebus.

Ok, then I'll be sure to remind you what you said as I look out at you through the small slide opening in my metal door, when people are rioting in the streets over $20 a gallon gas and there is no bread to be had, because all the diesel trucks are parked on the side of the road unable to deliver food.

THis will be my view of Red, as I peer out.

[TheNiche]

Because if the office is not where you live, you are screwed. Remember, this aint the 50s and 60s, when Dad worked for the same company for 40 years, then retired. Today's employees change jobs...even careers...several times over their working life. In a high priced transportation market, locating your business in a central location that is accessible through mass transit makes the job easier to get to. If you live in Katy, and both Chevron and Anadarko offer you a job, which one are you taking (assuming you aren't itching to sell that house you just bought)?

Right now, if you've got offers from Chevron and Anadarko, and you live in Katy, then you can probably get a firm in the Energy Corridor to give you an offer too. The Energy Corridor is actually the ideal example of what BryanS suggested as a possibility. More edge cities, and better defined by different industries competing for the same specialized kinds of workers.

Of course, the primary users of transit are not specialized labor, which is a category that tends to earn more and are thus is relatively more inclined to drive if it'll save them time and be more comfortable. Semi-skilled and unskilled labor is far more transit-prone, but also more ubiquitous...and they're less able to afford expensive inner-city housing.

Realistically speaking, the barriers to redevelopment of the inner city keep the rate of household growth there pretty slow as compared to suburban areas. As long as the preponderance of residential growth is suburban, and as long as people value both their time and money, most employers will find many advantages to moving closer to where the people are moving.

Niche, MC can't possibly know what the consumer's spending trends are, they can only see what THEIR customer's are using their credit/debit cards for. Even though virtually EVERY pump is a "pay here" I continuosly see lines 3 to 4 deep inside my Cheveron making purchases using CASH.

Does that strike you as unusual?

[BryanS]

You don't know what you're talking about. I'm going to blow you out of the water right now, very decisively, and then hopefully you'll go read a textbook about financial markets and institutions. If you need a suggestion, I'll gladly provide it to you.

Speculation is an activity, not a kind of person or entity.

The only way to outlaw speculation is for the government to set prices.

There is no one oil price. Price is specific to location and quality.

Eliminate the venue for trading oil in the United States, and trading will continue to occur overseas. And being a global commodity, the U.S. will still be a price-taker on a global market.

Now shoo...go read a textbook.

Who said anything about eliminating venues for trading oil? I don't advocate this...

If you have no legitimate need for a product or raw material - that you never intend, nor have the capacity to do anything with - you don't get to buy or sell it. Others that do have such capacity are welcome to buy and trade, as necessary. Other countries around the world would also have to come to this realization as well, as speculation in commodity markets, as an activity, can screw everyone in a global economy.

[TheNiche]

Who said anything about eliminating venues for trading oil? I don't advocate this...

If you have no legitimate need for a product or raw material - that you never intend, nor have the capacity to do anything with - you don't get to buy or sell it. Others that do have such capacity are welcome to buy and trade, as necessary. Other countries around the world would also have to come to this realization as well, as speculation in commodity markets, as an activity, can screw everyone in a global economy.

Speculation is an activity, not a kind of person or entity.

^Think about this. Hard. Activity. Not a person. Not an entity.

[RedScare]

Right now, if you've got offers from Chevron and Anadarko, and you live in Katy, then you can probably get a firm in the Energy Corridor to give you an offer too. The Energy Corridor is actually the ideal example of what BryanS suggested as a possibility. More edge cities, and better defined by different industries competing for the same specialized kinds of workers.

Of course, the primary users of transit are not specialized labor, which is a category that tends to earn more and are thus is relatively more inclined to drive if it'll save them time and be more comfortable. Semi-skilled and unskilled labor is far more transit-prone, but also more ubiquitous...and they're less able to afford expensive inner-city housing.

Realistically speaking, the barriers to redevelopment of the inner city keep the rate of household growth there pretty slow as compared to suburban areas. As long as the preponderance of residential growth is suburban, and as long as people value both their time and money, most employers will find many advantages to moving closer to where the people are moving.

That's the problem. Where are the people moving? The suburbs are not one place. They are the entire ring around downtown. When Anadarko moved to the Woodlands, only those employees in the Woodlands got a break on their commute. Everyone else had to drive farther, or move, as there is no mass transit to the Woodlands. And, just to screw up your simplistic solution, suppose the employee lives in Clear Lake or Kingwood?

The fact is, as personal transportation becomes more expensive, even skilled workers will not want to spend the money. If companies move to the suburbs, their labor pool will tend to be limited to that section of the suburbs. The company runs the risk of losing all skilled labor that is not impressed with that suburb, or who does not want to move. If the transit into town also runs out, counter to rush hour traffic, a company might locate next to that transit station to lessen the impact. But, it is still a tougher sell than a centrally located office accessible by transit. And, I don't see that many highly skilled employers in the burbs. Outside of Anadarko and a couple of oil companies in the Energy Corridor, most non-consumer driven employers are still closer in.

Note, mass transit allows one to stay in the burbs and commute inexpensively.

[Pumapayam]

That's the problem. Where are the people moving? The suburbs are not one place. They are the entire ring around downtown. When Anadarko moved to the Woodlands, only those employees in the Woodlands got a break on their commute. Everyone else had to drive farther, or move, as there is no mass transit to the Woodlands. And, just to screw up your simplistic solution, suppose the employee lives in Clear Lake or Kingwood?

The fact is, as personal transportation becomes more expensive, even skilled workers will not want to spend the money. If companies move to the suburbs, their labor pool will tend to be limited to that section of the suburbs. The company runs the risk of losing all skilled labor that is not impressed with that suburb, or who does not want to move. If the transit into town also runs out, counter to rush hour traffic, a company might locate next to that transit station to lessen the impact. But, it is still a tougher sell than a centrally located office accessible by transit. And, I don't see that many highly skilled employers in the burbs. Outside of Anadarko and a couple of oil companies in the Energy Corridor, most non-consumer driven employers are still closer in.

Note, mass transit allows one to stay in the burbs and commute inexpensively.

Love the response, I agree man. Light rail/Subway . . .something! We need the infrastructure started now.

[TheNiche]

That's the problem. Where are the people moving? The suburbs are not one place. They are the entire ring around downtown. When Anadarko moved to the Woodlands, only those employees in the Woodlands got a break on their commute. Everyone else had to drive farther, or move, as there is no mass transit to the Woodlands. And, just to screw up your simplistic solution, suppose the employee lives in Clear Lake or Kingwood?

The fact is, as personal transportation becomes more expensive, even skilled workers will not want to spend the money. If companies move to the suburbs, their labor pool will tend to be limited to that section of the suburbs. The company runs the risk of losing all skilled labor that is not impressed with that suburb, or who does not want to move. If the transit into town also runs out, counter to rush hour traffic, a company might locate next to that transit station to lessen the impact. But, it is still a tougher sell than a centrally located office accessible by transit. And, I don't see that many highly skilled employers in the burbs. Outside of Anadarko and a couple of oil companies in the Energy Corridor, most non-consumer driven employers are still closer in.

Note, mass transit allows one to stay in the burbs and commute inexpensively.

Two words: diminishing returns. Not every firm needs access to the region's entire labor pool. Sometimes having access to only a few hundred thousand willing commuters is enough.

[editor]

Does anyone know of an online betting pool service? I'm thinking of starting one to pick the date $10/gallon gas hits Houston.

[westguy]

Ok, then I'll be sure to remind you what you said as I look out at you through the small slide opening in my metal door, when people are rioting in the streets over $20 a gallon gas and there is no bread to be had, because all the diesel trucks are parked on the side of the road unable to deliver food.

THis will be my view of Red, as I peer out.

We'll have to go back to using ports, rail yards, airports, and downtown warehouses. There's no way to reach Wal-Mart's breakthrough distribution system by anything other than truck.