Oil at $1,000 per barrel?

Great Debates
41

[QUOTE=Lemur866]
But that’s not going to happen in crude oil speculation. You can’t get in on the ground floor in an industry that’s been in operation for over a century. It’s easy to speculate that the price of oil is going to be higher in the long term future, with decreased production and increased demand, but how high is that price going to get in the short term? Demand for oil isn’t going to double next year, the supply isn’t going to halve. So any speculator who thinks that the global price of oil will be 4 times higher on May 7th 2009 is an idiot, because the market is fairly well known.
[/QUOTE]

Couldn’t similar things have been said about the housing market 5 years ago?

  • “An industry in operation for many centuries”
  • “Demand for homes isn’t going to double next year, the supply isn’t going to halve.”
    etc

Yet, crappy homes in the SF Bay Area, that went for, say $300,000 in 2000 go for $1.1 million dollars now.

Yes, the prices may come down a bit, since the bubble is starting to deflate, but the point is that even in a mature industry, with no “amazing prospects” like the Internet had in the early days, if enough people buy into the “it’s going to go up” mentality, they will buy and buy until the price becomes unreasonable and unsustainable.

And, while the price is on the rise, it may even be a rational choice to invest, even if you know it is a bubble, because you know that it has a long way to go before it bursts, and you can make some short-term profits.

So, even if oil traders know that this is a bubble, if they believe that it will burst at $200 (if they believe that at that price it will become unsustainable and burst), it makes sense for them to buy oil now. This will almost surely have the effect of driving the price to $200, even if everyone knows that we are in the middle of a bubble.

42

I’m confused…you seem to have turned the discussion completely around from the original OP.

[QUOTE=Polerius]
I may be mistaken about this, but I assume a country like Saudi Arabia can increase production relatively easy, without having to find “difficult wells”.
[/QUOTE]

The Saudi’s are very secretive about their actualy capacity. My guess is that to a certain degree they can increase production…but not by all that much. Because Bush ASKED them to increase really doesn’t mean they could though. Bush is an idiot, and it was a stupid request on his part…though this shouldn’t be exactly surprising to anyone.

The thing is…they can only increase production marginally at this point. My guess (guess, ehe?) is that Saudi is running pretty close to flat out these days and that production is going to start to drop off at some point in the next decade or so (maybe earlier).

[QUOTE=Polerius]
That’s why I’m finding all these predictions naive: “If the price of oil goes up, production will increase and prices will come down”.
[/QUOTE]

This is you not understanding the points being made I’m afraid. No one is saying that if the price of oil goes up production increases automatically and the price goes down. What people are saying is the IF you could get the price of oil to be $1000/barrel you’d need to do so by making oil so scarce that it’s value increased to ridiculous levels (this leaves aside the fact that it never would regardless, but it’s your game…I’m just playing). To do this you’d have to halt or greatly reduce production (i.e. you’d need to stop taking oil out of the ground for long enough that nations would draw down on their strategic reserves)…which would have the effect you were going for. Having done that production would invariably increase (probably long before this actually, but again, it’s your game) because someone out there in the world would not go along. By increasing production there would now be more product available, thus the price would go down…because the the artificial bubble (well, mountain) would burst.

[QUOTE=Polerius]
Countries may have reasons not to increase production to keep the price down.
[/QUOTE]

If you halted production to such an extent that you could get even in the ballpark of your $1000/barrel then why do you suppose everyone would continue to go along (again, this leaves aside the question of why they would have gone along in the first place…answer, they wouldn’t have). Let’s say that you limited their production to 1/16th of their current capacity somehow. And let’s say that pretty much this 1/16th of product is basically sitting on the shelf, pretty much unused because no one can afford it. What will happen? Well…I seriously doubt the oil is just going to sit around at a fixed price, unbought. So…the price is going to plummet basically, until it reaches a level where someone WILL buy it. Because you see that oil doesn’t do you, the producer, any good sitting around unbought…you get no money that way.

Having found a price where people are willing to buy it…well, they are going to buy it. Now, you could simply keep producing your 1/16th of product and artificially keep supply high…but most likely if demand is still high at this point ( :dubious: ) you are going to want to ramp back up your production at some point to take advantage of that. Putting more oil on the market (more supply, ehe?) will naturally decrease the price back to some new equilibrium price. Having broken ranks other oil producing nations will naturally think to themselves ‘why the hell are we still only extracting 1/16th of our capacity’ and will probably follow suit…which will further drive the price down.

Down to what, ehe? Well…probably to around where oil is today because (excepting the fact that it’s a bit overpriced atm due to speculation) oil IS at it’s equalibrium price. Oh, it might not come all the way back to where it is today (or it may go lower if people have found alternatives why you were screwing around with cornering the market and making oil scarce), but it would be in the ball park.

[QUOTE=Polerius]
Also, even if production is increased, the prices may not come down, due to, for example, increased demand.
[/QUOTE]

Exactly. In fact, that’s pretty much where we are atm. Production has been increased but it’s not keeping up with demand…so, the problem is on the supply side of things, which keeps oil relatively scarce and keeps the price up. Couple that with uncertainties in the market and you have…well, the situation we have today.

[QUOTE=Polerius]
So, stating confidently that “If the price of oil goes up, production will increase and prices will come down” ignores the realities of how the world works.
[/QUOTE]

It also ignores the point nearly everyone was trying to make to you.

-XT

43

[QUOTE=xtisme]
What people are saying is the IF you could get the price of oil to be $1000/barrel you’d need to do so by making oil so scarce that it’s value increased to ridiculous levels
[/QUOTE]

What you seem to be failing to grasp is that I am saying that due to speculative bubbles, you can get to ridiculously high prices, even without making the commodity scarce.

Look at the housing prices in the US. Homes didn’t become more scarce. The population didn’t explode. But speculation (people buying homes not for themselves, but to sell them later to make a profit) resulted in huge increases in housing prices.

Same with oil. If enough people buy oil futures, not to use the oil, but as an investment to sell later to make a profit, because they think oil prices will go up, then they will go up.

No scarcity needed, no cornering the market needed.

44

BTW, you failed to address this point:

[QUOTE=xtisme]
Lets assume that this increase from $25/barrel to $120/barrel is a natural progression (personally I think it’s a bubble…and one that is bound to pop when people realize that demand is dropping in the US at least).

[/QUOTE]

So you do think bubbles are possible in the oil market.

What caused the bubble, in your opinion? Was it speculation?

Whatever caused the bubble, how high do you think a bubble can push the price of oil before the fundamentals bring the price back down?

If that temporary price spike is huge, then it causes problems for the economy and for consumers. The same with price spikes in any necessary good, e.g. wheat.

An example were the huge price spikes for electricity in California, circa 2000. They eventually went away, but not before causing a lot of trouble for the state and consumers.

Can we protect vital goods (oil, electricity, food) from suffering huge spikes in prices, due to the inherent instability of free markets?

This is the point I was mentioning in the OP.

45

[QUOTE=Polerius]
What you seem to be failing to grasp is that I am saying that due to speculative bubbles, you can get to ridiculously high prices, even without making the commodity scarce.
[/quote]
Look, according to your own cite, the Energy Information Administration thought that speculation contributed perhaps $5 to $10 to the price of a barrel of oil costing $102. Let’s take the median case, that 7% of the cost of oil in March was due to speculation. I’ll take a bold stand and say that 7% really isn’t much of a bubble.

So why is the price of oil high? DOE says: “Caruso said higher oil prices also stem in part from strong global economic growth, shortages of experience workers, equipment and construction material in the oil industry, and political instability in regions of major oil production.” Shocker! It seems that supply and demand are the culprits!

And what’s the outlook for oil prices?

What a shocker! The DOE thinks there’s going to be an increase in oil production and more alternative fuels. Which, if you were paying attention, is pretty much what everyone here has been saying while you simply repeat your mantra that economics doesn’t apply to oil.

46

[QUOTE=Polerius]
What you seem to be failing to grasp is that I am saying that due to speculative bubbles, you can get to ridiculously high prices, even without making the commodity scarce.
[/QUOTE]

I grasp the concept of speculative bubbles just fine. I grasp the fact that they can and will and have happened in the oil industry. What you are failing to grasp is that by and large the mechanisms are self correcting…and that you will never get the ridiculously high prices you speculated on in the OP. Currently we are (IMHO) IN one of those oil price bubbles…which I expect to pop at some point causing prices to drop (somewhat). I could see the price for oil dropping back to $100 or even $90 /barrel. But even to speculate that the price bubble would double the current price (to, say, $240/barrel) is out there…let alone your $1000/barrel.

It’s not going to happen merely through speculation…only some kind of major disaster is going to push oil that high in the short term. In the long or medium term I expect that eventually oil MIGHT get that high…though I doubt it. Long before it reaches that level alternatives will be impacting the market and the price…and demand will taper off and then go down.

[QUOTE=Polerius]
Look at the housing prices in the US. Homes didn’t become more scarce. The population didn’t explode. But speculation (people buying homes not for themselves, but to sell them later to make a profit) resulted in huge increases in housing prices.
[/QUOTE]

But there are other reasons for the housing bubble than speculation (the loan market for instance had more of an impact than speculation)…housing and oil are not the same thing, they aren’t traded the same way, and they are really bad comparisons. Why did housing prices go up? Because you had too many people (many not qualified for the loans they had) chasing too few houses in prime areas. Oh, to be sure it’s more complex than that…but essentially that’s what happened. How is this in any way comparible to the oil commodities market?

But even there you don’t have housing going up to 10 times it’s actual value due solely to speculatory inflation. You have houses going up maybe double their actual market value by and large…and most going up far less than that. So, even if you think of some convoluted way to equate the two you can’t get to your $1000/barrel (which is 10 times it’s current market value, give or take a few).

[QUOTE=Polerius]
Same with oil. If enough people buy oil futures, not to use the oil, but as an investment to sell later to make a profit, because they think oil prices will go up, then they will go up.
[/QUOTE]

Again, this shows a lack of understanding of the oil (or commodities) market. You don’t buy oil futures and then tuck them away somewhere to bring out on a rainy day…and you don’t buy oil futures at ridiculously inflated rates because if oil goes down then when you have to deliver it guess who gets stuck with the bill??

[QUOTE=Polerius]
No scarcity needed, no cornering the market needed.
[/QUOTE]

I’m sorry, but it really doesn’t work that way. Maybe someone better able to convey their thoughts will come along and explain it better. I’m obviously not making an impression.

-XT

47

[QUOTE=Polerius]
BTW, you failed to address this point:
[/QUOTE]

Ravenman (and your own cite) pretty much answered these questions, so I’ll let you chew on that first before bothering. If you still want me to answer them I will, though I think I actually addressed most of these points up thread…if not me than I’m sure other posters did at any rate.

-XT

48

[QUOTE=Ravenman]
Look, according to your own cite, the Energy Information Administration thought that speculation contributed perhaps $5 to $10 to the price of a barrel of oil costing $102. Let’s take the median case, that 7% of the cost of oil in March was due to speculation. I’ll take a bold stand and say that 7% really isn’t much of a bubble.
[/QUOTE]

Just because the current size of the bubble is small does not mean that larger bubbles can’t come along.

In fact, when that assessment was made, the price of oil was $102, and now it is $122, so if the fundamentals are the same, then speculation has added $25 to $30 dollars, which is roughly 28% of a price increase, which is not negligible.

If you read the sentence correctly “Caruso said higher oil prices also stem in part from …”.

So, even though they are culprits, they are not the culprits, as you falsely claim.

And I never said that fundamentals don’t play any role. In addition to fundamentals, speculation or other mechanisms, can cause bubbles.

Nice big strawman you have there. Do you want a match?

49

Of course bubbles are possible in the oil market. Who’s denying it? No one. It’s just that everyone else except you thinks that price bubbles have a natural ceiling. How high can the bubble get? Who knows? It’s an impossible question to answer. It can get as high as it can get, and then it can’t get any higher, and no one can answer that question, and if they could, they’d be making a killing by selling at the top of the bubble.

The people trading in oil futures aren’t buying barrels of oil and stockpiling them in warehouses. They are saying that they will buy or sell oil at a certain price, and deliver or accept it on a future date for a certain price. But who’s going to buy future oil at $400 a barrel when they can buy current oil at $125 a barrel? And in fact, long range futures for oil are lower than for current values. Which means that most “speculators” believe, not that oil will get more expensive, but that it will get cheaper.

Which is the opposite of a bubble, which is what we had during the 90s with the oil glut. Oil prices were high, everyone invested in new production and started pumping oil to cash in on those high prices and suddenly the world was awash in oil, and the price plummeted to record inflation-adjusted lows. And Americans started buying Humvees because gas was cheap, and would always be cheap forever. And since prices were so low, oil exploration was halted and new sources left untapped. And then China and India started to drag themselves out of the middle ages, and now we’re back to high prices.

Now, what do you want to do about it?

Is the problem that a speculative bubble could increase gasoline prices, not by a modest 10% but by 50% or 100% or 1000%? Well, that’s pretty unlikely, because as everyone said, it’s hard to see how $40/gallon gasoline could be competitive with electric cars. So while such a thing is possible, it’s really really really unlikely. But it could happen! Except if such a thing were happening, then the benevolent Great White Fathers in Washington would step in and pass some ad hoc legislation to deal with the crazed speculative bubble.

So since a modest speculative premium is not only possible, it is happening right now, we know a bubble can occur. But since we’re talking about and recognizing the bubble right now, it is likely that we could be nearing the end of the bubble in a year or less.

The need for government regulation today to prevent the spectre of 1000% speculative bubbles tomorrow is dependent on how likely we think that 1000% speculative bubble to be. Since most people think a 1000% bubble is a fantasy, there doesn’t seem to be any need to fix the problem. And if the problem actually does occur, well, why don’t we fix it then?

50

[QUOTE=xtisme]
You don’t buy oil futures and then tuck them away somewhere to bring out on a rainy day…and you don’t buy oil futures at ridiculously inflated rates because if oil goes down then when you have to deliver it guess who gets stuck with the bill??
[/QUOTE]

The question is “what are ridiculously inflated rates?”

When oil was $25 a barrel, if someone wanted to sell it to you at $120 a barrel, you would have thought that that was ridiculously inflated.

Now that everyone has had time to adjust to the fact that $120 is the price of oil, paying that much per barrel is no longer ridiculous.

Who can say what people tomorrow or in a few months will come to accept as a “reasonable” price for oil?

$150, $200?

People are conditioned by what they see around them, and what they read in the media. If everyone says that this is the right price due to the situation in Iraq, Iran’s nuclear ambitions, China’s ascension, bla bla …, then people will accept that that is the reasonable price for oil, even though the price got so high for other reasons.

Same happened with the housing and Internet bubbles. In the middle of those bubbles, you had the media trying to come up with all sorts of reasons why it made sense, from a supply/demand and fundamental point of view for these things to be priced so high.

And of course, once the bubbles burst, those same media were rushing to explain that what just happened was actually a bubble and explaining to people why the bubble happened.

Main point:

  • Bubbles happen in free markets
  • They can cause huge increases in prices.
  • Until the price comes back down due to the bubble bursting, people suffer if these are vital goods (oil, food, etc)
51

[QUOTE=Lemur866]
The people trading in oil futures aren’t buying barrels of oil and stockpiling them in warehouses. They are saying that they will buy or sell oil at a certain price, and deliver or accept it on a future date for a certain price.
[/QUOTE]

What’s the time horizon for oil futures?

Can I buy oil futures for 6 months from now?

If yes, then I assume these oil futures are traded between now and then. So, I could buy and sell oil futures, without ever intending to buy a single barrel of oil. Is this correct?

52

[QUOTE=Lemur866]
Of course bubbles are possible in the oil market. Who’s denying it? No one. It’s just that everyone else except you thinks that price bubbles have a natural ceiling.
[/QUOTE]

I don’t deny that they have a ceiling.

However, the ceiling might be very high. For vital goods (electricity, food, etc), if the ceiling is too high, it will cause problems for the economy and for consumers.

Even if $250 (and not $1,000) is the ceiling for oil, that would still cause a huge problems for most Americans due to the doubling of gas prices from their current levels.

53

I can see a possible scenario that would get us $1000/barrel oil that no one has mentioned yet: Massive inflation of the U.S. dollar. Or would the world oil market react to that long before it gets there and switch to the Euro or whatever currency is more stable at the time?

*** Ponder

54

[QUOTE=Polerius]
The question is “what are ridiculously inflated rates?”
[/QUOTE]

Something far beyond what the market will bear…like, say, $1000/barrel. :slight_smile:

[QUOTE=Polerius]
When oil was $25 a barrel, if someone wanted to sell it to you at $120 a barrel, you would have thought that that was ridiculously inflated.
[/QUOTE]

And it would have been ridiculously inflated. You realize that if you adjusted that $25 for inflation it would be a bit more, right? The price didn’t go from $25/barrel to $120/barrel overnight…it took years and there were multiple factors involved, most of which had nothing to do with speculation or a price bubble.

[QUOTE=Polerius]
Now that everyone has had time to adjust to the fact that $120 is the price of oil, paying that much per barrel is no longer ridiculous.
[/QUOTE]

Because it didn’t happen over night man! It was a gradual progression. And btw, people ARE squeeling about the price…which is why already you are starting to see less usage of oil based products in the US as demand decreases due to the cost. People are adjusting.

[QUOTE=Polerius]
Who can say what people tomorrow or in a few months will come to accept as a “reasonable” price for oil?
[/QUOTE]

My guess is it will be in the $120/barrel range tomorrow. A few months from now? No idea (if I did I could make enough money to retire), but my guess is it will drop sometime mid-summer or early fall.

[QUOTE=Polerius]
$150, $200?
[/QUOTE]

Doubtful, though it’s possible I suppose. I guess I’m not getting your point here.

[QUOTE=Polerius]
People are conditioned by what they see around them, and what they read in the media. If everyone says that this is the right price due to the situation in Iraq, Iran’s nuclear ambitions, China’s ascension, bla bla …, then people will accept that that is the reasonable price for oil, even though the price got so high for other reasons.
[/QUOTE]

To a certain degree this is true…people are used to price variance in things like gas/oil. However, it’s untrue that they will simply meekly accept this without changing their habits. We are seeing already that just at the level of prices now demand is dropping in the US…which is probably why this particular bubble is going to pop fairly soon. If the price of gas/oil goes higher you will see even more people finding alternative ways to get around it. Perhaps larger car pools or alternative fuels…who knows? The point is that as the price climbs demand will drop off in the US…and prices will drop unless some othe country picks up the slack and gobbles up that high priced oil. Which I tend to doubt, considering their citizens probably aren’t willing to pay more than they have to without finding alternatives either.

[QUOTE=Polerius]
Same happened with the housing and Internet bubbles. In the middle of those bubbles, you had the media trying to come up with all sorts of reasons why it made sense, from a supply/demand and fundamental point of view for these things to be priced so high.

And of course, once the bubbles burst, those same media were rushing to explain that what just happened was actually a bubble and explaining to people why the bubble happened.
[/QUOTE]

Leaving aside the anything else…I’m not sure I’m following your point here. So…there was a bubble, it popped and the market re-adjusted itself. What’s the problem exactly?

[QUOTE=Polerius]
Bubbles happen in free markets
[/QUOTE]

No one afaik disputes this.

[QUOTE=Polerius]
They can cause huge increases in prices.
[/QUOTE]

Well, depends on your definition of ‘huge increases’ I suppose. But again, so what? Bubbles cause artificial price increases. And…?

[QUOTE=Polerius]
Until the price comes back down due to the bubble bursting, people suffer if these are vital goods (oil, food, etc)
[/QUOTE]

Ah…I see. So, what you’d like to do is…what? Control the prices of goods and services so that you don’t get any bubbles? Or something like that?

Realize that while I and others in this thread are saying there MIGHT be a price bubble in the cost of oil today, it’s not the main reason that oil is so expensive right now…nor is it the main reason that gas at the pump is so high. And speculators aren’t going to drive the price up to the ridiculous levels in your OP because that would be far beyond what the market would bear. What WOULD the market bear? No idea to be honest, though I’m guessing (in the short term) that anything higher than $140/barrel would probably send demand down even further causing the bubble to burst. That number of course is just a WAG on my part…I really have no idea, and am just basing that on the fact that we are already seeing demand falling just with the prices we have.

Which gets back to that self-correcting mechanism thingy. The housing bubble, the internet dot com bubble, the over inflated price of US currency…they all pretty much self corrected. To be sure in the short term some folks were hurt…such is life.

-XT

55

OK, to make this even more confusing, but maybe less.

Oil is traded in US dollars. (everywhere IIRC) Is the weak US dollar one of the causes the rise in oil prices? So without increse demand, or a decrease in production, because the dollar gets weaker, the price of a barrel of oil goes up to compensate.

56

[QUOTE=Polerius]
I don’t deny that they have a ceiling.

However, the ceiling might be very high. For vital goods (electricity, food, etc), if the ceiling is too high, it will cause problems for the economy and for consumers.

Even if $250 (and not $1,000) is the ceiling for oil, that would still cause a huge problems for most Americans due to the doubling of gas prices from their current levels.
[/QUOTE]

OK. And so what do you want to do today about the possibility of a problematic bubble tomorrow?

You have to weigh your guess as to the probability of the bubble, the likelihood of the severity of the hypothetical problematic future bubble, against the costs of your present intervention. And those costs can be direct, like taxpayer money spent on the strategic oil reserve, or indirect, like incentives for consumers to waste more oil today, or disincentives for producers to produce more oil tomorrow.

57

[QUOTE=Polerius]
What’s the time horizon for oil futures?

Can I buy oil futures for 6 months from now?

If yes, then I assume these oil futures are traded between now and then. So, I could buy and sell oil futures, without ever intending to buy a single barrel of oil. Is this correct?
[/QUOTE]

Yes.

NYMEX

Many people would actually buy options on futures rather than trade directly in the futures market if they’re not actually interested in obtaining the commodity.

But, if you have enough money to maintain the margin requirement, you can open an account at a commodities broker and trade oil futures.

58

And if you seriously think oil is going to go up a lot then I suggest you invest heavily in the current price with every penny you have…in 6 months you should be able to retire to a warm beach somewhere…

-XT

59

[QUOTE=Polerius]
In fact, when that assessment was made, the price of oil was $102, and now it is $122, so if the fundamentals are the same, then speculation has added $25 to $30 dollars, which is roughly 28% of a price increase, which is not negligible.
[/quote]
Why don’t you provide a cite for that outrageous claim that all of the additional price increase is due to speculation?

Why don’t you look up what Caruso said? You’re implying that Caruso says that speculation is a driving cause of price increases. He actually said, “Current oil prices are above EIA’s reference case estimate of the long-run equilibrium price, driven by recent strong global economic growth, shortages of experienced personnel, equipment, and construction materials in the oil industry, and political instability in some major producing regions.” Sounds like he’s saying prices are higher than what he’d predict based on those factors. Funny that speculation wasn’t mentioned, huh?

You also say that production isn’t expanding. Caruso says, “U.S. crude oil production grows from 5.1 million barrels per day in 2006 to a peak of 6.3 million barrels per day in 2018, primarily due to increased production from the deep waters of the Gulf of Mexico and from the expansion of enhanced oil recovery operations in onshore areas supported by higher crude oil prices.” Oh noes! Higher prices mean more production!!1!

PDF cite.

You’ve said repeatedly that Econ 101 doesn’t apply to “real world” issues. Either stand by your words or retract them.

60

[QUOTE=Ravenman]
You’ve said repeatedly that Econ 101 doesn’t apply to “real world” issues. Either stand by your words or retract them.
[/QUOTE]

The field of Economics is much larger than what is covered in ECON 101, as you surely know.