Suck it. The weakening dollar is part of the problem. PART. That of course is a problem of the economic manipulations of this government .
Oil is traded on the Dubai Oil Exchange. It is a new invention to allow the big oil brokers to escape even the lightweight regulation of this twisted government. Oil price nears 100 a barrel. The price does not drop accordingly. It should be under 3 bucks. How much looting do the oil companies want.
Are you actually ignorant of commodity speculation? You may keep your well earned title.
I thought you were blaming speculators for the high prices. Now it’s the oil companies again? You might want to get your villains straight. You have failed to answer my numerous questions, but let me pose this one again: if people are manipulating prices due to their greed, why have prices gone down?
You calling someone “ignorant,” especially about this topic, is about as perfect a definition of irony as one can find.
I’m not sure I agree with you. Truckers pay gas taxes like the rest of us and they pay a fairly large amount in these taxes because they don’t have good fuel mileage. What study are you basing your opinions on?
There are some differences. Wheat is perishable, hence can’t be stored indefinitely; farmers can’t usually afford to hoard; things like that.
Are you suggesting that Exxon Mobil can afford to go without income till 2016? The storage issue is obviously different, but the idea that it would make good business sense to shut down all production operations and wait for higher future prices would likely send shareholders into apoplexy.
Its not free to pump oil out of the ground, transport it somewhere and store it for years either. That’s a long term capital cost that you’d be gambling on with a hell of a lot of money.
If you just left it in the ground there would still be issues to…you’d need to develop the entire infrastructure to get it out of the ground and get it to market. And that could take years, so best have a really good crystal ball as to when to get started to optimize your investment.
-XT
With respect to the keeping it in the ground awaiting a future opportunity part of this debate;
I agree that once large scale field delineation and production drilling has taken place in a given reservoir no one can afford to shut off the pumps and leave the oil there. The sums of money invested need to be paid back into the government coffers (wrt national oil companies) or the banks for International/independent operators pronto.
However it is not unrealistic to expect that governments would keep reserves in the ground for a future rainy day. The governments can control these reserves by controlling the leasing/sale of blocks and it works for both national and international/independent oil companies. The US gov has essentially done this by excluding drilling from a large amount of federal land/water.
Note that the reserves in question are typically not well defined reserves that you would see quoted on a companies books as Proved, probable and possible , but rather reserve estimate based on geological studies and the odd exploration/geological control wells and lead to the numbers that are often thrown about as possible oil reserves in the ANWAR/offshore federal waters.
OK, let’s say for sake of argument that Firefly Oil owns a bunch of oil in the ground, and I’ve been pumping oil out of the field and selling it already; the infrastructure’s already in place. Let’s assume further that my grade of oil is selling for $100/barrel for immediate delivery. Meanwhile, people expect to have to pay $200/barrel for my oil in 2016, and the present value of $200 in 2016 is $145, so the 2016 oil futures are selling for $145/barrel.
So I go into the futures market, selling oil for delivery in 2016. I collect $145/barrel now for all that oil, without having to pump a thing. I’m coming out ahead $45/barrel right here and now, without having to do anything besides promise to deliver my oil in 2016.
The Firefly Oil stockholders are delirious, because they’re getting much bigger dividends than they would if I were actually pumping the oil.
The other oil producers see what I’m doing, and says, “we want $145/barrel (give or take, based on quality) for our oil, too, so we’ll sell it on the futures market, too, like Firefly Oil is doing.”
Then people realize, “omigod, if we don’t pay $145/barrel for oil right now, we won’t be able to buy oil.” So they bid $145/barrel, I and the other producers sell them oil at that price today, and the Universe is in harmony once more.
I think I’ve ‘shown my work’ here sufficiently that if either I don’t understand how things work, or I’ve made a hash of the market logic, I’m sure y’all can show me the precise point at which my hypothetical case goes off the rails. 
You wont get 145 now.
You have agreed to sell the oil for 145 in 2016. You will get your money then.
I say, you miss the point: Since everyone is selling in futures, there is less oil now. Thus, people pay more for the current oil, as they need it.
Once it reaches the equal of the value in the futures, Firefly Oil starts pumping again, because the money now is more important than the money in the future.
It would be the first time either. Let me try again.
OK so firefly oil has assets and no doubt has a cash flow and not insignificant expenditures.
Cool so you sell some futures, you don’t get 145 bucks though. You will get paid the 145 on settlement day which is in 2016.
No, firefly oil stockholders see their cash inflow evaporate and they still have huge cash outflows. They have not received 145buck per barrel. that will be in 2016. Now sure the available oil on the spot market drops, which may cause a spot market rise in price, which could drive up the futures price.
The other oil producers pull up deck chairs and snack on canapes whilst watching Firefly Oil shareholders do unspeakable things to rtfirefly. They probably are selling their oil on the futures market, but the just want to be assured of a price in the future. If they do shut in production today their shareholders will inflict similar unspeakable deeds.
No the people who need oil today go to the spot market and pay 100 bucks. As mentioned their may be a price hike because several producers have shut in. Todays spot price may or may not affect the futures price.
In short by going to the market and taking a future, you guarantee a price of 145 bucks in 2016. A happy end user has ensured they can buy for 145 in the future. You probably did not agree directly with the end user, rather an intermediary who will have paid the exchange a margin for the right to buy the contract. As he watches the price of the futures contract he holds (145) against the price of the 2016 delievries which will be fluctuating, his trading ballance will fluctuate. If he goes deeply negative (the wonder water car is invented and the 2016 delivers crater to 90 bucks) the exchange will make a margin call on him and make sure he has enough money to cover the deficit because he will be buying something he can only sell for 90 bucks in 2016 and the exchange does not want to be out of pocket as the guarantee the transactions).
the thing you need to do as a producer is to ensure you have the oil available in 2016 to deliver. Now if you have shut in then fine you will turn the spigot on in 2016. However Firefly oil will long since ceased to be a viable entity as it collapsed under debt burden because it had no cash flow to pay back its creditors or pay its people etc etc
NBC
Well, I would get $200/barrel in 2016, then. (The only reason for getting $145 instead of $200 was I was getting my money now, rather than in 2016.) And I could sell the contractual obligation of $200 in 2016 for $145 minus a risk premium, amount dependent on the buyer, today.
I think that changes subsequent steps in your variant somewhat. Do the deck chairs and the canapes still come out, for instance, and if so, why?
Well I come back to the same point , you are not getting anything now. You have a contract to sell at 145 in 2016, you will not receive any money into your bank account today. In fact you will have paid out a margin to the exchange. You are not getting your money now.
So why do I think your share holders would be upset.
Yesterday you were selling oil at 100$/bbl and getting cash flow to offset your costs.
Today you have shut in production and do not have oil to sell to get cash flow.
You do have a contract to sell at 145 in 2016 for which you have paid a margin, but you will not receive any money until you sell the oil in 2016.
Your share holders are now wondering how you will pay todays bills and manage cash flow.
(no snark was intended with my deck chairs comments)
A slight hijack here - I’m just wondering if dalej42 is going to contribute to this thread that he started or if he’s simply a hit and run troll.
I’m guessing the latter.
Sorry I didn’t get back to this until now.
The Tar Sands are quite controversial in Canada. First, we do have the resources you’ve heard about - there’s about 1.7 trillion barrels of oil locked up in the tar sands - the U.S. uses around 20 million bbl/day, to give you some perspective on how big that is.
Unfortunately, not all of it is easy to get to. At current prices, there’s maybe 200 to 300 billion barrels that are economically recoverable. But technology improves all the time, and if ‘peak oil’ is true, the price will go up higher - maybe over $200/bbl, and a lot more oil from the sands will be profitable.
There are other challenges, however. There are now over 100 billion dollars worth of tar sands projects waiting to be built in Alberta - but we don’t have the manpower to do it. And the infrastructure is strained and creaking. So development is going to take a long time. Also, there are serious environmental problems with tar sands development. Water, natural gas, and CO2 emissions are all issues. The congress in the U.S. has already debated declaring tar sands oil an ‘unconventional’ source, which would prejudice the U.S. against it. Oil from the tar sands currently has something like a 50% greater carbon footprint as light crude from the middle east, because of the energy required to extract it.
Alberta is seriously evaluating building a nuclear plant to power tar sands development, which would eliminate the extra CO2 problem. But that will take a long, long time to come online, if it’s even built. We’re also spending huge dollars on carbon capture and sequestration, but that’s still pretty speculative.
In the end, Alberta might be able to ramp up tar sands oil production to the point where we’ll be shipping a few million BBL/day more than we are now. That means we can’t possibly supply enough to meet all U.S. needs, even if there’s enough in the ground to theoretically do it.
Whose hypothetical is this - yours or mine?
The reason for $200 in 2016 is to deal with the question, “what would happen to the market for oil to be delivered NOW if the expected value of oil in 2016 is substantially higher?”
If we say that expected value is only $145, then the difference between now and 2016 is a hair above 4% per year - IOW, arguably not more than it is now.
So your new hypothetical **doesn’t address the question.
**
So how about we assume that the expected value of oil in 2016 is $200, and that’s how much money that Firefly Oil will get then?
If under those circumstances, my hypothetical still collapses, that’s one thing. But if you redesign it so that all I’ll get in 2016 is $145, of course my shareholders will be upset, because the PV of $100 today and $145 in 8 years aren’t very different - maybe not different at all. The whole point of this example is to explain what would happen if they were distinctly different.
I am not trying to change your hypothetical, it is more likely I am missing something. We need to be sure we are on the same page as to how the futures market operates.
If you go to the futures market and sell oil for delivery in 2016 this means you have entered into an agreement to sell oil in 2016 for whatever the settle price is that you agreed, which in your hypothetical is 145. 145 may be the PV of 200 in 2016. 200 may be the spot price in 2016 however you will sell the oil at the settle price of your contract.
No you do not collect a penny. No money enters you bank account today. That is not how a futures contract works. You will have paid a margin to the exchange for the opportunity to write a sell contract. You will not be paid 145 today. You will be paid 145 in 2016 when you deliver the oil as per the sell contract you have made with the exchange.
You have to do a lot. You have to maintain a margin balance with the exchange to ensure you have enough cash to cover your obligations. The exchange does not know if you have the oil or not to honor the contract. Hence they need to be sure that on settle day in 2016 you have the financial capability to buy at the spot price and sell at your contract price. So they want to be sure that you have maintain a margin balance to be able to buy oil at 200 in 2016 and the sell at 145.
As a contract is sold in 1000 bbl lots, they want to be sure you have 55,000 dollars per contract you hold in your margin account with the exchange. (margin requirements for pure speculators are a little more onerous than for suppliers or end users)
Essentially by taking a 2016 contract with a settle price of 145 all you have done is guarantee your sell price of 145 in 2016. This is below the expected value of a bbl of oil in 2016 by 55 dollars. You have in addition in your hypothetical shut off your production so you now have no cash flow to support your operations or keep up with your margin requirements.
Once again I emphasize, if you enter into a sell contract today with an exchange you will not receive any money until you actually deliver the oil and then you will receive the amount it says on the contract.
NBC
See below.
In my hypothetical, I’m either getting $145 now, or $200 in 2016. You keep changing that to my getting $145 in 2016.
So you are in fact changing my example, despite my repeated attempts to set you straight.
I’m reaching the point where I have to assume this is deliberate. Are you trolling, or what?
Ain’t this a hoot? Of course I’d lock myself in to a contract to sell oil at 145 at a time when I expected it to be trading at around 200. Maybe I should just sell oil for $50/barrel now, and get rid of all the additional complications!
Yep, you’re blond, alright.
You seem to be missing the point of a futures market.
You see, in a futures market, you pay now for a delivery later.
Eg, the $145, now, is the future equivalent of $200.
No you enter into a contract now to buy at a fixed price later. Only the margin price is paid now. When the settle date of the contract arrives, you will pay for the commodity at the agreed price.
RT I am not trolling, in fact I thought we were having a fairly civilized discussion. I do admit to being blond. We seam to be hitting a fundamental difference on how futures contracts work.