Gorsnak, great post…wonderful explaination of the realities of the situation. completely wasted on gonzo unfortunately…he probably thinks you area ‘libertarian’ to.
-XT
If there is a fixed amount of oil left in the world, and if low supply means a higher price per barrel then which of the two following strategies makes more sense:
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Keep the supply low and earn a higher price per barrel until it all runs out
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Increase supply and bring down prices and earn a lower price per barrel until it all runs out.
It seems to me that strategy (1) makes more sense for a good that has a limited amount left.
Are you unequivocally stating that the current price is the true reflection of the current balance of supply and demand? If yes, then barring any major changes or
technological breakthroughs, you are predicting that $60 per barrel will never happen again. Is this correct?
Isn’t this not true for commodities futures options? You can buy and sell options for oil futures and you never need to accept delivery of a single barrel of oil.
When the Hunt brothers tried to corner the silver market, what “benefit” did their actions cause? As I recall, they drove up the price of silver, so people who needed any product made with silver had to pay more. If you had to have an x-ray, you paid substantially more for it, due to the actions of the Hunts. How did this benefit you?As I recall, the market eventually turned against them, and they suffered losses. But for several years, they caused an anomalous rise in the price, and caused a lot of fine old silver table ware, to be melted down for bullion.
Speculators sometimes stabilize markets, but they don’t do anything out of love for humanity-its for their own greed.
They were making out like bandits until they could no longer be ignored. I started to invest in silver before they cornered it. My investment was at about 7 to 8 an ounce. It went up rapidly. When it was found out that they were manipulating ,the price dropped like a rock. I still have a little left but nobody trusted the silver market anymore and it did not rebound for many years. The illusion of fairness is part of the game. They killed that.
This is a debate forum. If all you got is snottyness you should be ashamed. Got a site . I will read it. Got an enlightened view or opinion ., I will read it. Only that does not happen. Your posts only give no info, they just reveal you. That is sad.
Yes, a futures option is just an agreement to sell or buy from someone a futures contract at a future date for a certain price. The options can be liquidated with no one actually needing to go and get involed in buying or selling a futures contract. It is more like interested observers sitting on the side betting on the outcome with out actually getting involved. So you could say options trading does not affect the actual price being bet upon to as large an extent as the actual trading of the futures contract. That is all well in theory if people are writing uncovered options and are prepared to liqidate for a cash settlement or can find a way to cap a losing option by writing or buying an option the other way. However to cap a losing option peole often have to go and buy the future contract at what ever price it is today in order to prevent a big upcomming predicted loss, at which point they do get involved in the futures contracts.
Saudi used to be a relative back water for the service company industry, low tech & low prices as the wells were generally vertical post holes. Right now it is rivling the Gulf of Mexio for service company revenues. ARAMCO has gone very high tech and is trying to boost supply with a pretty staggering level of new drilling and technology application. The current investment does not seam to point to an intention to keep supply low, they are just maxed out and strugling to grow, and the industry is at capacity in terms of supply new drilling units and tools.
As Gorsnak mentioned in his good post upthread, it is unlikly that OPEC is telling the truth and is trying to armwave away what people are seeing, namely OPEC and Saudi dosen´t have as much swing as they used to.
http://www.tri-cityherald.com/915/story/202563.html George Soros who even you guys have to admit is familiar with investing and oil speculating says it is a problem and suggest it needs to be curbed. Hedge funds are an impetus. What does it require for you people to see what is stunningly obvious.?
In your cite George Soros said the following
“There is a speculative bubble superimposed on the fundamentals of supply and demand,” Soros said
Which is consistent with the position adopted by many here. The debate seams to have moved from what if it is caused to how much of the price rise is caused.
This is a false dichotomy. I would do whatever maximized the present value of the future stream of cash flows I would earn. Of course I would also need to take into account the available capital I had. Also, since in your example you are talking about someone large enough that their supply can have a noticeable impact on the market price, so I would also consider the potential impact my actions would have on the market’s ability to find a substitute or curb the need for my product. In the real world, people produce as much as they can as long as it is economically profitable to do so.
What you are saying may be correct, but I was referring to the theoretical behavior of a seller of a good with a finite supply.
Say I have 10,000 Widgets, and there are no more Widgets in the world, and no one can make new ones. And say that these Widgets are a pretty necessary part of people’s lives, but Widgets are good for only one use.
So, I could sell them at a rate of 100 per year, which would drive the price up, and my supply would last me 100 years at this high price.
Or, I could sell them at a rate of 1000 per year, ten times the previous volume, which would drive the price down, and my supply would last me 10 years at this lower price.
In this case, I think it makes sense to limit the number sold so that you extract the maximum value out of your supply of Widgets.
However, if you had a virtually unlimited potential supply of Widgets (that is, you were able to manufacture more than the 10,000 you already have), it may make sense to sell more per year at a lower price, depending on the demand curve.
Oil is more akin to the case of a limited supply of Widgets, so it seems to me that the owners of the oil would try to extract as high a price as they can for each barrel left in the ground, which can be accomplished by limiting supply (of course, it should be done to a degree that does not drive the world economy into chaos, which would damage them also, and does not drive the price so high that the impetus to find alternative fuels skyrockets and people find a way to replace oil before the oil runs out)
Agreed, but isn’t the present value of the future stream of cash flows very different for a good with a limited supply left in the world, vs a good that has a practically unlimited supply?
Agreed.
I would still do whatever I would need to do to maximize the present value of the future stream of cash flows. In your theoretical example, would you rather sell 100 widgets a year for 100 years at a price of $10 or 1000 widgets a year for 10 years at a price of $2? Assume that the weighted average cost of capital is 9%, which is a fairly common discount rate used.
In that case, you would be better off at the 1000 a year for 10 years at $2 case. Even though the undiscounted future stream of cash flow is $20,000 versus $100,000 for the 100 a year for 100 years scenario, the present value of the cash flow would be $13,990 versus only $12,109.
You are missing out on many important variables that would need to be accounted for before making a correct decision.
I am unequivocally stating that the current price is fundamentally based on the current balance of supply and demand, yes. If the price were artificially high we would be seeing significant increases in production and/or inventories, and we are not. I suppose it might be that the Saudis really could crank up another 4 million bbl/day, but I don’t see any reason to believe that. Even if they could, that doesn’t change the fact that the price is an accurate reflection of supply and demand, since then the Saudi decision to produce at current levels is part and parcel of the level of supply.
I am not saying $60/bbl will never happen again. It might, if various oil-producing regions not producing at their potential atm for political reasons suddenly solve those political reasons. If Iraq, Venezuela, etc were to suddenly flower into open, free market economies with stable, peaceful political regimes, then oil production would increase - whether it would increase enough to get us down to $60 I don’t know, but we are obviously on a pretty steep section of the price curve, so it might. The other thing that could drop the price significantly is if China stops subsidizing gas prices, which I would think would have a noticeable impact on demand. And of course someone could solve nuclear fusion and fuel cells and then nobody but plastics manufacturers would care about the price of a barrel of oil.
Finally, keep in mind that your widget example is only going to apply to entities capable of really long-term planning. Saudi Arabia might be such an entity, and your analysis might be correct in their case. I doubt it, but I could quite easily be wrong. However, a very, very significant portion of global oil production is done by multinational corporations that are concerned primarily with next quarter’s profit. Shell and ExxonMobil and such are not intentionally underproducing to increase the ultimate value of their reserves, I guarantee you.
Soros and Ramm have a message.
Rampant speculation has helped spur out of control crude oil prices.
That was there for all to read and enjoy.
:rolleyes: You haven’t bothered to read or respond to any of the cites in this or the other oil thread. You’ve stated that demand is down…when I and others have shown you repeatedly that it’s not. You have yet to respond to that link…or even acknowledge if you’ve read it. Instead you continue with your drive by links that usually have only a passing resemblance to what is being discussed…and leave it up to the reader to click the link and try and figure out what the hell your point may be.
You wouldn’t know a debate if it stood up and bit you on the ass, gonzo…most especially on this subject. It’s clear you don’t know and are unwilling to learn how the commodities market actually works. Even more, you are unwilling to even learn the basics of how supply and demand works…and are unwilling acknowledge that world wide oil demand is up, contrary to your assertions. You link to opinion pieces by George Soros (!!) as if he’s an authority…and then it’s clear you either didn’t read the piece or didn’t understand it!!
-XT
They may have a message, but that does not make that message true.
LonghornDave posted up thread two differing points of view held by some of the major investment banks, one saying its is all due to speculation, the other saying it is partially due. Soros admitted he is not an expert in oil and his company does not engage in oil trading (not that I would completely discount his view point because of that) and so I think it is clear that amongst the experts out there, there is disagreement.
Incidentally that Foxnews article you quoted was a horrible. Whilst his points of raising the required margins to make it more expensive and less attractive for speculators to get engaged in the market has some merit, there are also those who have suggested to do so can actually lead to further price rises. For his basis that it is all speculation he simply said , it is not supply and demand because world production is at an all time high and world demand did not meet supply there for it is all due to speculation. He is either being disingenuous or he is a muppet of the highest order, which may explain why he left investment banking to me a talking head on Fox.
Again … worldwide consumption has not increased over 25% in four months.
Yet price-at-the-pump in the U.S. has increased over 25% in four months. Why is the price-at-the-pump in the U.S. rising that much faster than worldwide consumption?
While I see the logic in your post, does your theoretical business plan on not being in business when it sells all its Widgets?
As the saying goes, “A bird in the hand is worth two in the bush.” Business have to plan for the future and need capital to do so. If they do not have the capital to do so now, because, e.g., they are limiting the selling of their supply of something, they will have to borrow it, and the cost of borrowing will heavily factor into their business operations. Only with crystal ball like foresight would anyone really not to try to maximize current value. If anything, the extra capital can be saved and earn a return, and depending on what markets, will out pace the cost of borrowing.
Put it another way: Would a business be willing to risk its future profits on sustained or climbing prices for its limited Widgets when alternatives and downward pressures to demand are in the horizon?