Re: OT Gas Prices and the Blame Game

In article <4831D7DA.614C6D3D@xxxxxxxxxx>, Paul Hovnanian P.E. wrote:
Don Klipstein wrote:

In article <482E5171.24925F89@xxxxxxxxxxxxx>, Paul Hovnanian P.E. wrote:

<SNIP previously quuoted material>

Better solution: restrict the sales of oil futures to those who can
actually take delivery of the product.

There is too much money chasing resources. That drives prices up. Record
profits for oil companies run counter to the theory of supply and
demand. At best, if a refiner's cost for crude goes up, they can pass
that cost through to the customer. In reality, they consume some energy
internally, which would reduce their profit margin. But, if their
profits are being made on hedging in the futures market, they can pass
crude futures back and forth, tacking on a little for each transaction.
Much like Enron did in California a few years back.

If I sell stocks short, my broker is obliged to ensure that I can cover
my position. If speculators buy crude futures, they should be required
to show proof that, when the tanker shows up, they have someplace to put
it.

All of the oil long futures contracts expire sometime in the hands of
people obligated to buy. Those that can't take delivery and make use of
it (such as refining it and selling refined products) have to sell it off,
or else they are out the money they spent satisfying their contractual
obligations.

Buying a quantity of oil and reselling it (especially without taking
delivery first) has zero net effect on the supply.

But it increases demand for that fixed supply.

The need to resell it increases supply as much as the obligation to
purchase increases demand. To the extenty that long futures contracts are
demand, the expiring ones produce supply.

Have you seen the flip side? Excess of people taking a short position
on something (in my experience usually a stock) often bid prices up in the
process of buying the shares to pay back the ones they "borrowed" as part
of betting that the price will go down.
If a lot of people bet that the price of something will move some way,
the price will follow the bets on a short term basis. On a longer term
basis, supply and demand do their thing. As for petroleum, what I see is
owners of supply holding back to sell later when the supply has decreased
and prices accordingly rising.

The main supply issue that I see is owners of supply waiting for the
price to get higher - which it will, since oil is a limited resource that
is being consumed. Prices will rise until they force consumers to
switch to alternatives, or simply cut back, or until the price gives a
profit motive to develop new alternatives.

Bush has been running around, trying to convince producers (particularly
the Saudis) to increase oil production. At this time, they are refusing
to do so.

They have a profit motive to refuse to do so.

One way to interpret 'increase oil production' is to buy lots of
expensive technology to increase the yield of marginal fields. When one
makes this kind of investment, they need to pay careful attention to the
long term price of oil. Once the equipment is in place (and needs to be
paid for), that places a floor under the economic cost of that field. An
oil industry analyst I heard on NPR recently placed that break even
price used by many producers today at about $60 per barrel. Bush wants
producers to buy $100/barrel technology.

Is $60/barrel the total cost to the producer of producing and delivering
the oil, or only the cost of the extraction technology?

Meanwhile, if Bush indeed wants producers to buy $100/barrel technology
to push oil prices down to not much over $100/barrel, he's even dumber
than I already thought he is. The oil companies will buy plenty of
$100/barrel technology when they can make money doing so. They lack
profit motive to spend $100/barrel on extraction costs to increase supply
now.

Guess who sells most of that production equipment? We (the USA) do.
Well, the French and Russians do too. But look at what happened to their
last customer (Iraq) who had the nerve to buy from our competitors.

Another interesting note: Iran has an excess of crude oil right now.
There is less demand for their product, since it is sour (high sulfur)
crude. Refining it is more expensive. Also, Iran suffers from a shortage
of refining capacity. They have to import finished product from other
countries. One wonders why, if this is so, Iran doesn't partner with
someone possessing production know-how, build the facilities to make use
of their domestic crude and sell product. Answer: Anyone stupid enough
to invest money in an area where the US is looking for an excuse to bomb
would have to be nuts. Our administration is keeping that oil off the
market until 'our boys' can sign a deal with a friendly Iranian
administration.

- Don Klipstein (don@xxxxxxxxx)
.

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