Figure the difference between speculation and institutionalized speculation and get back to me. Institutionalized spec does not have a mitigating effect. It pushes prices up. With practically no downward pressure.
I am old enough to remember when there actually was competition in oil prices. When you pulled into a station they cleaned your windows,checked your oil and tires. Sometimes you got green stamps to trade in for gifts. They also gave prizes away ,glasses and plates etc. They had price wars. Wild competitive price wars.
But we let merger after merger happen until there were few companies. Now competition is long gone. It is an unhealthy industry for America.
How? How if oil is a dwindling resource and the DEMAND for this dwindling resourse is rising will speculation help do anything but raise the price up even further? Speculation doesn’t work unless there are huge fluctuations in supply and demand. Short of new sources of oil being tapped, or demand going down thru an alternate fuels comming online, I fail to see how speculation is doing anything but causing oil prices to rise. Are you saying that once an alternate fuel comes out we will see the benefits? Give an example of continuing decline in oil supplies and continuing increase in oil demand where speculation reduces the price please.
Your assumption is that we will not discover any new oil sources. That is a pretty weak assumption, given the history of oil exploration. The idea that oil is a “dwindling” resource, while popular, flies in the face of the history of oil exploration. Whenever people have been foolish enough to make predictions abou how much oil we have left, in a few years these predictions have always been overtaken by events.
Speculation, as the article I linked to explains, introduces liquidity and certainty into the market. It helps to spur investment in exploration. Limiting speculation means limiting the ability of the oil market to work properly. That means, essentially, restricting supply. That leads to higher prices.
How about this for a change – why don’t you actually explain what you’re talking about. No drive-by links, no irrelevant commentary, just an explanation of what you mean. Why don’t you explain the difference between the two and why speculation pushes prices up.
Institutionalized speculation is when a percentage of a fund is earmarked for a purpose such as buying oil futures. They will raise the price but the fund will not react like an individual. They just buy a big chunk and sit on it. As these funds continue to buy the push is upward. So the original purchase seems justified. The prices are not dependent on supply or demand. They just push the price up .The problem is that this may be another bubble.
1987 Black Monday was an example of how computer and institutionalized investing could fry a market.
Some years back Amoco stations did this, but I don’t believe they do now.
One place where there are spot shortages is northern Mexico. Seems their government subsidizes gas prices and it’s below three bucks a gallon there, encouraging Americans (the U.S. kind) to cross the border and tank up.
Do institutions have unlimited cash? Isn’t there competing market forces in – you know – a market? Don’t these contracts (please read Renob’s cite) have to be executed eventually, and with the ever increasing price, aren’t people going to simply stop buying it? When this happens, these funds will act exactly like people and sell or take the loss (or minimize it). The reason you’re not seeing it is b/c they have so many millions of dollars to leverage.
Also, I disagree with your assessment on the 1987 market crash. The crash started in Hong Kong, moving westward to the US. HK wasn’t using institutional computerized trading (and why is this a bad thing when even more people are doing in now? e.g. Globex (part of the Chicago Merchantile Exchange) spreads into Singapore and Germany, NYME, Australia) at the time, and the US was.
No ,there is no pressure to push back on oil prices. I see the result a nice bubble . We get to bail out more financial institutions. The point is that they are allocating huge resources to oil futures. Just like housing it looks like it will never end. Like housing ,it appears to be an endless ride up. After all in most of our lives house prices never went down. But, many experts see the real price of oil at about 80 bucks.
Bingo.
Since the government isn’t stupid enough to impose price controls (actually they are, they just haven’t), the price is allowed to rise where it reaches equilibrium at a lower demand.
Does it? IIRC, they predicted the peak of American oil production fairly accurately.
Yes, we still have plenty of oil left. However, the cost of explorer and drilling for new supplies of oil will likely continue to rise. That’s just simple logic. It is a fact that there is a finite amount of oil and I believe it is a reasonable assumption that the easiest oil to locate will be the first oil extracted.
In my own uneducated oppinion, high oil prices are due to an increase in demand caused by the industrialization of China and India without an equivalent increase in refining capacity.
There seems to be PLENTY of gasoline and diesel around: just this morning, I noticed that an independent station (closed since October 2007) reopened for gasoline sales. this tells me that there is no supply problems-quite the contrary. So, if the skeptics are right (massive speculation driving up petroleum futures) we might well see a price collapse.
Have any Dopers out there heard of something called the Bakken Formation? Its supposed to be some kind of gigantic oil reserve in the Dakotas or thereabouts.
Previous thread discussing the Bakken formation here
The concensus was it won´t help that much (some but it is not the next saudi)
Interesting point about refining capacity. Crude supply has not risen as fast as crude demand. The refining capacity (turning crude oil into useful stuff) is impacted by the quality of a refinery.
A basic atmospheric refinery can take a reasonable quality crude and get maybe 50% useable products out if it, the rest goes to bunker oil and nasty crap. Bunker oil is ok for oil fired power production and older ships, but does not help the gasoline demand.
In the US , refineries take crude and vacuum distill it and add in all manner of hydrotreting and hydrocracking (very simply put blowing hydrogen through the oil) this basically takes the crude and can upgrade it so you get a greater portion of useable product per barrel of oil.
Now the US is flush with these types of refineries, and India has done a good job of building high end refineries at a phenomonal speed. (google reliance and some of its refinery projects, the green field to working refinery times are stunning)
China and Russia do not have good quality refineries, hence they need to use more crude than a US or european refinery per gallon f diesle and gasoline produced. This is having an impact on world crude demand.
Refining capacity has increased on the existing refineries. There is no back up due to a shortage of refining.