The Absurdity of the Oil Market
April 25th, 2008 at 03:08pm Mark Noonan
Illustrated thusly:
Oil prices rose sharply Friday on news that a ship under contract to the U.S. Defense Department fired warning shots at two Iranian boats. Retail gas prices as expected rose further into record territory, nearing $3.60 a gallon.
Word that a U.S. ship had fired on the boats in the Persian Gulf raised concerns that a conflict between U.S. and Iranian forces could cut oil supplies from the region. Light, sweet crude for June delivery jumped as high as $119.50 on the news before retreating to trade up $2.70 at $118.76 a barrel on the New York Mercantile Exchange.
Prices were already up before the report on news of a pipeline attack in Nigeria and a looming refinery strike in Scotland.
There is no shortage of oil, nor any real risk of a serious interruption of oil supplies…and yet the price of oil is skyrocketing for these very stupid reasons: a shot fired near Iran, a pipline attacked in Nigeria, a proposed strike in Scotland. None of these issues actually threatens oil supplies. What gives? Pure speculation - fools are outbidding each other at famine prices for a commodity the world is slopping over with, and as long as the price keeps rising, the fools will continue to make money. How long will it go on? Beats all heck out of me, but one should keep in mind that if you are putting out an oil future at $115.00 for June delivery, you are actually expecting the price to be higher than that in June, so you can make a profit Eventually, though, the wall will be reached - a point at which those who buy oil will give up and just cut production of petroleum-based products rather than have their profit margins destroyed, or being forced to raise their prices to a point where people stop buying their products. The collapse, when that comes, will be rather spectacular.
Taking one thing with another - increased demand, etc - the price of a barrel of oil is probably overstated by a factor of three or four right now. The market is distorted by the influx of speculative dollars as people try to cash in on oil prices which never go down…sorta like the speculative dollars which poured into the American real estate market because we all know that once real estate starts to rise, it can never go back down again, right? Stupid people - and they are going to get burned, and burned very badly.
Entry Filed under: Economy
20 Comments
1. js | April 25th, 2008 at 3:22 pm
speculation is driving the price of gas up..not production costs…not value of oil…nothing but profiteers exploiting capitalism…the same thing happened to the housing industry…or does anyone really believe the house they bought for 75k should really appraise at 250k in 5 years?
wake up, its the abuse of capitalism…pure greed…that is wrecking this country….
2. Rich | April 25th, 2008 at 3:49 pm
meanwhile-
http://www.nytimes.com/2008/04/24/world/middleeast/25iraq.html?_r=1&hp&oref=slogin
Sunnis Agree to End Boycott, Rejoin Iraq Government
BAGHDAD — “Iraq’s largest Sunni bloc has agreed to return to Prime Minister Nuri Kamal al-Maliki’s cabinet after a boycott that lasted nearly a year, several Sunni leaders said on Thursday, citing a recently passed amnesty law and the Maliki government’s crackdown on Shiite militias as reasons for the move.”
Do we still have anyone left that thinks Al-sadr won the battle of Basra? He also told his men to observe the ceasfire today.
3. bagni | April 25th, 2008 at 4:25 pm
markoil
the radarian readers like the book
“twilight in the desert’ by simmons
might be worth a quick skim for you?
and do you think this price raising
is just the current admin and opec
testing how far the price elasticity window can go?
4. SteaM | April 25th, 2008 at 5:07 pm
Why is a contracted ship firing at another nation’s boats anyways?
Who authorized that? I mean, maybe no one did because no one has to.
We need serious oversight and regulations regarding these lawless and careless American contrastors.
Do you agree?
Might be a matter of national security.
5. Mark Noonan | April 25th, 2008 at 5:15 pm
SteaM,
It is rather curious, and I would like to know more about it - but it is not entirely outside the realm of the practical…the Navy has larger issues to deal with than minor activities like coastal security, and as the Iraqi navy is not ready, there might be some private firms doing the work…though I’d prefer they be under a Congressional Letter of Marque, just to put everything on the complete legal level.
6. Mark Noonan | April 25th, 2008 at 5:17 pm
bagni,
I have my suspicions on it all, but I don’t think its the oil companies - the price they get for their product is a result of the market…and no one was weeping for them when, once upon a time, the price fell to about $10 a barrel. My bet is that fools are jumping on a bandwagon created by some financial sharks…who may have all sorts of reasons for doing what they’re doing from pure greed to a desire to harm the United States.
7. js | April 25th, 2008 at 5:53 pm
the people who are really benefiting from this whole thing is OPEC…and many of them consider the US to be thier enemies…our government could stop oil futures, period…that would allow the market to adjust…instead of just sitting back and doing nothing….wall street is a big part of it all…and thats the interest of many heavy investors into the us economy, including the saudi’s who could lose ten trillion dollars and not miss a meal….
8. Bill Eischeidt | April 25th, 2008 at 6:57 pm
1. Not really. It’s more the way financial markets work with all sorts of things even the decreases in prices work the same way with all commodities. Oil being a finite recourse that costs big bucks to get out of the ground or from under the sea that is flammable and very politically important [See venezuela and iran] is one of the more volatile commodities that trades because most economies cannot do without it.
5. Interesting. You could use those letters to effectively triple the forces on the ground in Iraq. That might actually “win” that war.
6s and 7s. As long as the US dollar is worth less than 1 Euro or 125 Yen or 1.4 Pounds Sterling then oil is going to be seen as a “quality” speculative investment. Oil is valued at a higher cost and bid that way because it will be utuilized to the fullest profit possible when refined. No one is going to throw away a 1000 barrels of West Texas Intermediate because it’s not going to be usable. By the time the refining is done and those 1000 barrels are 100 barrels of gasoline and 500 barrels of deisel fuel you have made a profit and you haven’t even considered esoteric lubricants yet.
This isn’t just about OPEC or Chavez or Ahmadinejad it’s about a weak dollar policy and a commodity that the world is consuming at a rate of 60 million barrels a day, every day 365 days a year. 13 million barrels of oil a day just to keep the United States in gasoline at a rate of 388 million gallons a day.
9. William Teach | April 25th, 2008 at 8:47 pm
It may not seem like a “conservative” point of view, but, I would like to see oil taken off the exchanges, just let it be sold straight from the producers to the oil companies who sell it for fuel and stuff, that way people cannot play games and artificially drive up the price. It is way too important a commodity for the entire world to keep these games going.
10. Canuckguy | April 25th, 2008 at 11:12 pm
Mark stated “There is no shortage of oil,…”.
How can he actualy say that what with all the info saying otherwise. Global demand is up mainly due to India and China but production is not matching the increased demand. hence the higher prices. It will get gradually worse but like the frog in the slowly warming water, he stays put and eventually will be broiled.
11. congressive | April 26th, 2008 at 12:29 am
You give Halliburton Cheney, Chevron Rice and Texas-Oil Bush the keys to the gun locker, and WHAT IN THE FREAKING HECK DID YOU THINK WOULD HAPPEN?
Elect Bill Gates president and what do you think would happen to the price of software? Drop? He’d cut his own financial throat?
YOU DID THIS TO YOURSELVES by cheerleading your executioners for the last seven years. IT’S YOUR FAULT!
Whaaaaaaa! Market speculators! Whaaaaaa! No shortage! Whaaaaaaaaaa! How long? Whaaaaaaaaaaa!
Babies.
The only solution: Impeach. Now. Throw open Cheney’s secret energy policy meetings to criminal prosecution. Whaaaaaaaa! Not fair! Whaaaaaaa! Can’t speak freely! Whaaaaaaaaaaaa!
Babies.
Hey, I know. Let’s elect McSame! He’ll certainly rescue us, right? Right?
12. Mark Noonan | April 26th, 2008 at 2:20 am
Canuck,
There are somewhere between 1.2 and 1.3 trillion barrels of oil in the ground - and this is the oil recoverable using current technology.
US consumption declined 1.3% in 2006 (the last year with full details - and this before the really major spike in oil prices). China’s consumption increased 6.7%…but as US consumption in 2005 was 20.8 million barrels per day and China’s was 6.5 million, the 500,000-odd barrel increase in China’s consumption was partially offset by the 200,000-odd barrel decrease in American consumption. India gets a lot of blame, but its increase was only 6,000 barrels per day - well offset by Canada’s 25,000 barrel a day decrease.
Globally, the total consumption increase 2006 over 2005 was 0.7%. Total production increased by 0.4% - certainly, a tightening of supply, but not enough to justify the 90%+ increase in price over the past year.
13. js | April 26th, 2008 at 6:35 am
The real situation is we need to make great efforts to reverse our dependence on foreign oil. If the government set its goals to reduce this dependence in 2 to 3 years, we could really do it. Fed’s can over rule Florida’s government and drill in the gulf, finance a massive work effort, and establish multiple refineries across the nation…and finally get off thier butts and drill oil in Alaska…shale mining is feasible with oil at 200 bucks a barrell…
if they dont…our economy will be decimated…jobs will continue to decline…and a poverty that has not been seen since the great depression….we are just at the tip of the iceberg….with food prices skyrocketing….and housing costs are astronomical…with taxation levels unprecedented in the history of America…the implosion of the usa could be a very real possibility..
14. bagni | April 26th, 2008 at 9:51 am
markoleum
please remove your human head from said oil hole in middle eastern ground
the orbital oil observers suspect since the price of a barrel has doubled in the last 12 mos this could be all about:
-weak dollar
-opec holds the keys and they aren’t happy with the u.s. occupation
-peak oil
-increased demand
-you should have listened to that freakshow jimmy carter when it came to less dependency on foreign oil
the short term solution?
-if you want to hurt terrorism, the saudis, the iranians, the chavez boi…..??
simply use 10% less oil
you humans will hurt them where it hurts
the message is simple right now….
use less of everything
it’s ok to not be planetary piggy
but since no one in the u.s. is willing to sacrifice sh*t you’ll just use the only option you have anymore….military…..
sorry…cosmically cranky this morning
15. Telstar | April 26th, 2008 at 9:52 am
• 11. congressive | April 26th, 2008 at 12:29 am
You give Halliburton Cheney, Chevron Rice and Texas-Oil Bush the keys to the gun locker, and WHAT IN THE FREAKING HECK DID YOU THINK WOULD HAPPEN?
Not exactly the way I would put it, but you make some very good points. It would be nice to find out what deal was cut between Cheney and the oil executives at the start of the administration. Why was it so important to call the oil executive into the W. H. almost on day one? Did big oil with Bush’s assistance come together in an effort to dampen gasoline supplies? Is there big oil ant-free market collusion? We may never know since Cheney will not release meeting notes.
Over the past several years British Petroleum has shut down several refineries. They didn’t shut them down because of environmental issues or because there was a lack of demand or even a lack of oil. They shut them down because it is easier to dampen supply and charge one dollar margin on one gallon of gas then it is to charge 50 cents and have to sell two gallons of gas. But it almost takes collusion with the big players to move from a volume margin to a supply margin means of making a profit.
I believe even conservatives would agree if the next administration uncovers Bush administration collusion with big oil, those responsible for this thief of the American people must go to jail; even Cheney.
16. weefee | April 26th, 2008 at 10:21 am
Unfortunatly the strike at Grangemouth is on, its the hugely profitable company felt that it couldn’t keep making its huge profits unless it scrapped good pension schemes for new employees. There should be enough fuel but obviously people panic buy and as a result some places are reporting that there is no fuel left or else are rationing it. Americans are pretty lucky when it comes to the price of fuel the average price for a litre of petrol here is £1.10 and there is a 2p per litre tax hike coming in October. Ironic considering Scotland produces its own oil yet has one of the highest fuel prices in the world. Oil companies are making huge profits while everyone else has to pay through the nose for it and they get away with it, without ever really being questioned about it.
17. Christian Wright | April 26th, 2008 at 12:08 pm
High oil prices is what happens when you put a oil man in the White House.
18. Danish Artist | April 26th, 2008 at 12:45 pm
CW,
I know your daughter would know why oil prices are higher before you would. Stop with the typical liberal BS.
Oil prices are higher because of the liberal practice of “government is the solution to everything”. Liberals deny us the right to exploit our own resources. Liberals cause the mortgage crisis with interference in lending practices in the name of fairness never mind if the party can repay the loan or not. Because of that they demand lower interest rates to save their banking crisis. Lower interest rates devalue the dollar and we pay more for oil. Liberal/socialist thugs that Chavez also drive up oil just because he, like our fellow liberals here, has a huge case of BDS.
Our “oil man” in the White House wanted to drill in ANWR, IN A DESOLATE SECTION OF ANWR that was strictly reserved for that purpose. Of course the libs denied us that right.
As long as we don’t require the Saudis to increase production through the market - if they want to maintain their profits they would need to increase production. If other countries would exploit their oil sources and put more oil on the market, they would not have so much influence on the price.
But when we have liberal/socialists running around making anti-oil laws because of - some imagined global catastrophe, foolish environmental laws and other restrictions (that oil rig ruins my view of and other unnecessary big government crap - well “you must reap what you sew” or “the chickens are coming home to roost!”.
CW, don’t bother posting here, if stupidity were people you would be CHINA!
19. Christian Wright | April 26th, 2008 at 12:57 pm
Deleted - paranoid conspiracy theories.
20. William Teach | April 26th, 2008 at 4:04 pm
The Reality Based Community really is amusing, aren’t they? They have not a friggin’ clue in the world.