Tuesday, June 12, 2012

THE SLIPERY SUBJECT OF OIL

By and Large, the price of oil is determined by Commodity traders.

These Commodity traders bid on Futures Contracts, agreements to buy or sell oil at a specific date in the future for an agreed-upon price.

Most of these traders are representatives of companies that actually use oil.

They buy oil for delivery at a future date at the fixed price, lowering the risk to their corporations.

Three factors help determine the price of oil: 1) current supply in terms of output (greatly influenced by OPEC); 2) available oil reserves, which include what is available in U.S. refineries and what is stored at the Strategic Petroleum Reserves and 3) oil demand, particularly from the U.S.

Demand for oil usually rises during the summer vacation driving season. To predict summer-time demand, forecasts for travel from AAA are used to determine potential gasoline use. During the winter, weather forecasts are used to determine potential home heating oil use.

World crises in oil-producing countries can also dramatically increase oil prices. That's usually because traders anticipate the crisis will limit supply. This is what happened in January 2012, after inspectors found evidence that Iran was closer to building nuclear weapons than had been previously thought.

The result of this, and other turmoil in the Middle East, was that oil prices bounced around $95-$100 a barrel from November through January. In mid-February, oil broke above $100 a barrel and stayed there. Gas prices at the pump went to over $4.00 a gallon.

In 1989, oil prices were hovering around $20.00 per barrel. The Exxon Valdez oil spill dumped 250,000 barrels of oil onto the Alaskan coastline, devastating to the coastline, but only a tiny fraction of available oil supplies.

The explosion of the BP oil rig in the Gulf of Mexico spewed more than 18 times that amount, but had little effect on oil prices due to a slow recovery from the 2008 financial crisis and recession's slow recovery. It was only about 9 days worth of U.S. oil consumption.

For the time being, oil prices are dropping, and that has finally made its impact at the gas pump.

It is still about one and one-half times what it was when President BO (the child president) took office.

Since the price of gasoline at the pump is determined by the cost of crude, which is cntrolled by the factors listed above, it would make great sense to increase the total amount of oil available world-wide.

This could be accomplished if the U.S. would extract and release a significan amount of oil into the world market. After all, we have well over two hundred years of the entire world's total need for oil available under our own soil at today's consumption rates.

Add to that oil that it is ecconomically feasable to extract from "non-traditional" sources, and we could easily see $2.00 per gallon gasoline or lower at the pump within 6 months to a year.

That will take some political guts, though. Political guts is something that is in short supply in President BO (the child president)'s administration.

For more information you might enjoy a visit to these articles:

Reasons for High Oil Prices

Why Didn't the Gulf Oil Spill Raise Oil Prices?

How Crude Oil Prices Affect Gas Prices

What Are the Strategic Petroleum Reserves?

Commodities - How Commodities Trading Affects the US Economy

Futures Contracts - Definition of Commodities Futures Contracts Including O...

Price of Alternative Fuels - A Look at the Cost Factors that Affect Alterna...

31 comments:

Ducky's here said...

Once again you fail to understand the difference between crude oil and refined products.

Ducky's here said...

Add to that oil that it is economically feasible to extract from "non-traditional" sources ...

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At what price per barrel is oil shale a viable source?

Joe said...

Ducky: "Once again you fail to understand the difference between crude oil and refined products."

No, I did not. And had you bothered, you would have seen everything I said well documented and explained by experts in the field. Not Republican experts and not Democrat experts, experts...period.

Leave it to a leftist to form an opinion about a piece with absolutely no knowledge whatsoever.

Oh, and where is your documentation that you so freely demand of me?

I did not make that stuff up, nor is it my opinion about oil reserves.

The post is an amalgamation of research I did on the subject.

Some of it is my own phrasing of what the experts said. Much of it is from the very writings of the world renowned experts I studied for the post.

Of course, you know much more than they do...right?

And where in my post do you find oil shale mentioned?

Do you think oil shale is the only "non-traditional" source of oil?

You really don't know that much, do you?

Ducky's here said...

Surely you are not saying that refining capacity isn't a factor in the supply model.

Lisa said...
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Lisa said...
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Lisa said...

It's so refreshing to get educated by a liberal . They always have all the solutions and we can see how well that is working

Xavier Onassis said...

Joe - "Since the price of gasoline at the pump is determined by the cost of crude, which is cntrolled by the factors listed above, it would make great sense to increase the total amount of oil available world-wide.

This could be accomplished if the U.S. would extract and release a significan amount of oil into the world market. After all, we have well over two hundred years of the entire world's total need for oil available under our own soil at today's consumption rates.

Add to that oil that it is ecconomically feasable to extract from "non-traditional" sources, and we could easily see $2.00 per gallon gasoline or lower at the pump within 6 months to a year."

Nonsense. The amount of oil reserves in the United States is globally insignificant (http://www.nationmaster.com/graph/ene_oil_res-energy-oil-reserves). We could extract every drop of U.S. oil and dump it on the market it tomorrow and it would have zero effect on world oil prices.

A much bigger influence on domestic gas prices is the manipulation of refining capacity by Big Oil and pricing collusion. Do you not think it strange that in a free market economy where cometition supposedly drives pricing, that the price of gasoline rises and falls IN UNISON? Whatever price Quick Trip sets is the price that every other outlet sells it for. You'll be lucky to find a penny's worth of difference.

That doesn't look like free market competition to me.

Craig said...

Most of these traders are representatives of companies that actually use oil.

False. McClatchy did a review of the latest Commitment of Traders report from the Commodity Futures Trading Commission in Feb. 2012. 64% of the market was made up of speculators who'll never take delivery of oil. Source.

Your statement would be true if you made it 10 years ago. In 1986 oil-indexed price swaps started to trade on Wall St. Swaps had been limited to currency markets before that. In 1991 Goldman Sachs went to the Commodity Futures Trading Commission (CFTC) and were granted an exemption from regulatory limits on their trades. Other big banks were then granted exemptions. In 1993 CFTC chairwoman and wife of Phil Gramm, Wendy Gramm, approved a rule exempting key energy futures contracts from government regulation.

Then in 2000 Sen. Phil sneaked the “Enron Loophole”, vastly deregulating the oil speculation market, into the Commodities Futures Modernization Act. Now, just 8 banks control 34% of the oil futures market and they've never had to take delivery of even one barrel of oil. Once again, deregulation and "free" market solutions mean we take it in the shorts.

It is still about one and one-half times what it was when President BO (the child president) took office.

According to your source, oil peaked at $145/brl in 2008 then fell to $32/brl around the time Obama took office due to Saudi releasing more oil and the world wide financial market meltdown (thanks again to deregulation). Your source,

Prices are being driven by faster economic growth in the U.S., which the EIA forecasts will remain around the healthy 2% growth rate [in 2012].

Never mind your entire post undermines the 'Obama caused high gas prices' meme, economic growth under Obama has driven up the price. Whatya know.

This could be accomplished if the U.S. would extract and release a significan amount of oil into the world market

"The U.S." doesn't extract one drop of oil, private oil cos. do, including foreign owned ones.

we could easily see $2.00 per gallon gasoline or lower at the pump within 6 months to a year.

Nonsense. Show me one of your experts (the only one you cite is Kimberly Amadeo) that says this. OPEC has stated their goal is to keep prices at $70-$80/brl. They can do it because, according to you, they control 40% of the worlds reserves. No oil co. operating in the U.S. has any interest in seeing $2.00 a gallon. Outside of another economic catastrophe, it ain't gonna happen. The U.S. is currently a net exporter of refined product. We export more than we keep. Extracting more won't keep any more here.

Your last link has me confused. Did you even read it? Quote,

In a nutshell, American consumers are used to inexpensive energy. Much of the oil industry is heavily subsidized by the federal government—yes, paid for with tax dollars—making that so-called “cheap fuel” artificially inexpensive. Alternative fuels, especially biofuels, have not benefited from the same government subsidies, so they have borne the true cost of development and processing...“Is the public really getting ripped off?” we’ve been asked. Well, that’s a matter of perception, but we don’t believe that’s really so. When you think about it, biodiesel, ethanol, compressed natural gas, propane—even electricity—are all fuels that deliver what they promise. Power. And cleaner power it is.

Your source undercuts your previous argument. Well played.

Mark said...

Slippery"

Ducky's here said...

Joe, why is it so hard for you to accept the importance of refining capacity in setting oil prices?

Joe said...

XO: " The amount of oil reserves in the United States is globally insignificant."

That's false.

Every government department that tracks this from every angle disagrees with you on that, as do the independent researchers.

They, however, are universally wrong while you are right.

I get it.

Ducky's here said...

Whatever price Quick Trip sets is the price that every other outlet sells it for. You'll be lucky to find a penny's worth of difference.

That doesn't look like free market competition to me.

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Now you've done it XO. When Joe figures out that his simple price/demand function is only relevant in a market with competitive pricing he'll start accusing us of jumping to conclusions and I'll take the brunt.

For some reason Craig gets a free ride when he cleans Joe's clock.

Joe said...

Ducky: ""Whatever price Quick Trip sets is the price that every other outlet sells it for. You'll be lucky to find a penny's worth of difference."

That's wrong.

In Lee County, Florida prices rnge from $3.33 at the Hess station at the corner of Lee Boulevard and Air Park Drive to $4.05 at the BP station on Daniels Parkway at Treeline Blvd.

Guess they didn't get the Quick Trip memo.

Ducky's here said...

Yeah Joe, I see some variance inprice in Boston. The higher real estate costs are factored in.

XO is more rural so it isn't a big factor.

Mark said...

The Quik Trip down at the corner here is advertising gas at $3.25, while the Kwik Shop down the street has it at $3.23 and if you have a Dillons card, you can save up to 10 cents a gallon more.

Joe said...

Ducky: The guy who owns the BP gas station/convenience store/restaurant/Subway is a master gouger. He happens to be Aribic, as well.

Wasn't that some Joe Biden concern?

A Libertarian Patriot said...

Last Friday Obama said "the private sector is doing fine" This ridiculous statement is followed by Obama trying to walk back his comments with a conversation on how we need to hire more firefighters, police, and teachers to improve the economy.

This is a gleaming pinnacle of immense stupidity. Rather than just state the obvious and refute him, I want to delve deeper into what the core problem really is: Liberals do not understand the concept of wealth creation. I am hoping this post is not too technical, and you really try to understand, because I am dissecting one of the key cornerstones of liberalism.

When a product is created by a private company, it is something that is worth more than the raw materials that went into it. For example, bread is worth more than just the dirt, water, and seeds that were needed to create it. When bread is produced, each step adds value. Wheat is grown, which is worth more than seeds and dirt, harvested into a pile, which is worth more than an unharvested field, processed into flour, which is worth more than pile of wheat and baked into bread, which is worth more than the flour. Labor creates value at each step, which is wealth.

When government hires firefighters, policeman, and teachers, what does this have to do with wealth? Firefighters protect wealth from being burned into ash, Policeman enforce the law to allow an environment for wealth production, and government teachers ostensibly teach the new wealth creators of tomorrow. These services are necessary in one form or another, therefore, government is a necessary evil.

Economics 101 says there is a limited supply, and unlimited demand to all products and services. In the private sector, the forces of supply and demand will balance out. If a company sells something and makes a profit, it is because the company has produced wealth. By definition, the product is worth more than it costs to make it, and the consumer bought the product because there is still more value in the wealth of the product than the price they paid to buy it. For example, if an Apple Ipad costs Apple $300 to produce, and someone buys it for $600, Apple made a profit of $300. The wealth created is worth more than $600 to the buyer otherwise they wouldn't have traded the money for it! The money, of course, comes out of the individual's pocket to suit the needs of the individual, with a transparent relationship with the buyer and the seller. Meanwhile, Apple continues to hire more employees which help to create even more wealth to keep up with demand. These jobs are self-sustaining because the employees are paid out of a portion of the wealth they created.

What about government? Le'ts pretend your town only needs 5 fireman who together make a total of $250,000 a year to put out 100% of the fires in the town, which saves $1,000,000 a year in wealth from being burned to ash. What does Obama want to do? He wants to hire 10 fireman, because he says it will spur the economy. Is $1,000,000 in wealth saved suddenly doubled to $2,000,000 because twice the number of people were hired? No, it still saves 100% of fires which saves $1,000,000 per year. Instead, what happened is, for no additional benefit, the same service now costs double!

The claim from Dear Leader that hiring more government employees will spur the economy is pandering to ignorance. It's that age old argument "Everyone loves fireman, policeman, and teachers." In the above scenario, he is basically redistributing $250,000 from your pocket to government employees, and unnecessarily having two people share the workload of one! What is even worse is the average taxpayer only knows the work is being done, but has no idea they are being swindled!
Is it a wonder why a liberal maniac like Obama would believe that somehow hiring more government employees will improve the economy when in effect all it does is redistribute tax dollars?

Ducky's here said...

By definition, the product is worth more than it costs to make it
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A libertarian embracing the labor theory of value. Cool.

Ducky's here said...

... with a transparent relationship with the buyer and the seller.

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Since we're talking about the oil industry it's time to call b------- on that one. The contract is rarely transparent.

There are a number of hidden costs absorbed by the purchaser. Stuff like the United States armed forces handling extortion, protection and enforcement.

Xavier Onassis said...

A Libertarian Patriot - Like most conservatives, you have a very simplistic, and fatally flawed view of the world.

1. I can package poison in an attractive wrapper, market it as a"Revolutionary Weight Loss Miracle", mount an "As Seen on TV" campaign hawking it for $19.95, make a fortune and skip the country before the lawsuits get filed. Have I created wealth for anyone but me? Have I created any jobs? Have I been a Good American? Have I benefited society in any way?

2. I could start a Private Equity firm. Like a vulture searching for the sick and ailing, I can swoop down, buy a struggling company below their market price, load them up with debt, reduce my fixed cost by firing employees and selling off capital assets, give the illusion of recovery, sell the company and pocket the profits. Not just for the sale of the company either!

"In addition to the carried-interest deduction, two more provisions dear to the industry will be reexamined. One is the ability to shelter profits offshore. The other is the tax code’s favorable treatment of corporate debt—the very foundation of private equity. Right now, 100 percent of such debt is deductible, one reason for the industry’s huge profits."

Private Equity Vampires continue sucking the blood out of their victims forever.

Have they created wealth for anyone but themselves? Have they created any jobs? Have they been Good Americans? Have they benefited society in any way?

3. I can be a Rockefeller or a DuPont and be the beneficiary of a multi-million dollar trust fund. All I have to do is hire someone to keep my money moving around and earning interest. I don't create any jobs, I add nothing to the economy other than to increase my own personal wealth. Have I created wealth for anyone but me? Have I created any jobs? Have I been a Good American? Have I benefited society in any way?

Your simplistic view of Free Market Capitalism as an extension of a little kid's lemonade stand doesn't hold water and reveals you to be a simple person incapable of understanding complex macro economic systems.

EzzZee said...

These anti-Obama haters have been watching too much Fox News! He did the right thing for this country and his spending spree is now over. At least with him we'll know what we're getting; with someone new we're going to have to wait and see for 4 years while sitting on pins, getting an ulcer, and they're most likely going to lie to us to get our vote the loser they nominated . Vote for PRESIDENT Obama. He's our President, and our LEADER , let's respect him and the office!

Joe said...

EZ: "Vote for PRESIDENT Obama. He's our President, and our LEADER , let's respect him and the office!"

Not on your life!

I will respect the office, but HE (like you) must EARN my respect, something he has failed to do.

Lisa said...

EZ are you happy with what you got with Obama? Many are not and many didn't know what they were getting with him and yet many did which was why he only won by a small margin.,. I will take my chances with Romney at least it will be Hope and Change for real.
And if he wins the election we need to respect him as well yes?

"Vote for PRESIDENT Obama. He's our President, and our LEADER , let's respect him and the office!"

Not on my life either Joe

Darth Bacon said...

Hey Joe, have you seen this one?
"AP Hammers Romney for Lack Of Military Service"

, Well Duh! How about Obama's Lack of it?

At the end of May, Gallup released a poll that found Mitt Romney leading President Barack Obama by 24 points, 58% to 34% among veterans, who make up 13% of the population. Romney, who did not serve in the military, was doing better among veterans against Obama than veteran John McCain did. McCain beat Obama by 10 points among veterans in 2008.
A week later, on June 5, the Associated Press conveniently and coincidentally published a story that hammered Romney -- and three generations of his family -- for not having served in the military while giving Obama a pass for not having served.
The AP noted that although Romney was an early supporter of the Vietnam War, he avoided military service at the height of the fighting by seeking and receiving four draft deferments, which included a “a 31-month stretch as a ‘minister of religion’ in France, a classification for Mormon missionaries that the church at the time feared was being overused.”
The story also emphasized that neither Romney’s father nor his sons have served in the military and referenced his father’s comments about having been “brainwashed” in Vietnam. Those comments essentially ended his father’s chances of becoming president.

I wonder if the AP noted that our current President had very close ties with people who actively attacked and ridiculed our military? Did the AP run stories about what a war hero McCain was in contrast to who Obama hung around with.....yeah I think we all know the answers to these questions.
The Republican's had 3 war heroes, Bush 41, Dole and McCain Where was the media's love for service then!

Lisa said...
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Lisa said...

Darth it's too bad people don't do their own research and just depend the government lackeys over at MSNBC

My Observations said...

I just can’t and never will vote for Obama, no matter who the Republican candidate is. I just can’t let him win because of my stupidity. And I can't give him the excuse or let him think that he has a mandate. W gave him a mandate in 2008 and he betrayed us. He all but turned America into a Socialist Nation. I can only imagine what he’d do the second time around when he doesn’t have to suck up to the voters in 4 more years. I shudder to even think about it.. His populism makes me want to vomit whenever I hear it. And I’m so saddened by the people who believe it, I never realized that we had so many fools in this country, fools who can not see or appreciate what they have here, and what all these foreigners risk their lives to have. Were they not watching the past 3 1/2 years?
I refuse to REWARD the Obama administration who has been so full of corruption. I will stand up for what I believe in and I will not throw my vote to corrupt politicians and their corruptors… these communistic criminals who have taken over our government must be voted out..
I can’t stop these liberals from being idiots, but I beg you Libertarians not to. Ron Paul can not win so do not waste your vote!

Xavier Onassis said...

My only regret about Obama's administration is that he's been far too conservative.

Instead of going for a single-payer health care system like EVERY OTHER CIVILIZED NATION he caved to Republicans and Big Insurance by adopting the Romney Plan which only benefits insurance companies and doesn't give us true, cradle to grave, universal health care. He gets a FAIL on that.

He also gets a FAIL for not shutting down the illegal prison in Guantanamo and not pulling every single one of those illegaly held detainees into the American courts and charged with criminal offenses.

Charge them, represent them, produce your evidence, convict them or acquit them.

No nation has the authority to just round people up, cage them and hold them forever without just cause. Put up, or shut up.

But, he definitely gets a passing grade on reaching down and grabbing the American economy from the edge of the cliff that the Republicans drove us over and putting us back on the road to recovery.

There is no way in FUDGING HECK (this is Joe's blog)that I will let a Republican anywhere near the wheelhouse of the Ship of State as long as I breath air!

Every single one of them look at financial and social icebergs and think "OOH! Shiney Diamonds!" and they head us straight for them at Full Speed Ahead!

Obama also gets a BIG passing grade on endorsing same sex marriage.

You knuckle-dragging, Christian, Neanderthals can't quote a single verse of your precious bible where Yahweh or Jesus says "I define marriage as a union of 1 man and 1 woman." Because it never happened.

Marriage is not some divine institution ordained by a non-existent god. It's a cultural and legal construct defined by the secular society. If various religions want to layer it with ceremonies that cater to their archaic, medieval fantasies, that's fine. Go for it.

But marriage is clearly covered by the Constitution's "equal protection" clause. So kudos to Obama for upholding the Constitution against the attacks from the Right Wing Christian Fanatics who want to undermine our Constitution.

So yeah, FOUR MORE YEARS! FOUR MORE YEARS!

Joe said...

Darth Bacon: I don't think we allow Kenyons in our military, do we?

XO: "There is no way in FUDGING HECK (this is Joe's blog)that I will let a Republican anywhere near the wheelhouse of the Ship of State as long as I breath air!"

What are you going to do, kill them?

"But, he definitely gets a passing grade on reaching down and grabbing the American economy from the edge of the cliff that the Republicans drove us over and putting us back on the road to ecovery."

If we keep recovering like this, before long we'll die in the recovery room.

Xavier Onassis said...

Joe - "What are you going to do, kill them?"

Don't be silly. I'm not like you people.

I'll use the the most powerful weapon I have. My vote.