86 replies to this topic

[abolitionist]

what American would sit on an oil field when the country is hurting so badly due to skyrocketing oil prices?

profit motive is ideological poison

There are many reasons America is hurting but I don't know that high oil prices are among the foremost yet. Obviously the independent semi-truck drivers have been hurt as well as parts of the auto industry. In fact one of the hardest hit sectors thus far are the refineries and gas station operators. However gasoline in America has been less than half the price of Britain or Japan for decades and that's still the case. What is hurting Americans (and driving up the nominal price of oil) is the decline in the dollar. Of course it hurts those who HAVE dollars while being beneficial to those who on aggregate OWE dollars. Real inflation is the most politically acceptable way to lower real wages. Even if an employer gives cost-of-living increases each year pegged to the CPI they are effectively paying a lower salary if real inflation is higher than the CPI.

Wages in America have been falling in comparison to the rest of the world for quite some time and there's a ways to go to achieve parity. A major component of the elevated American standard of living after the advent of globalization was the willingness of foreign countries to accept USD as a reserve currency and not immediately exchange them for their local currency.

A high price of oil has serious implications for the economy but it seems it's the only effective way to encourage the massive wastefulness of energy we've grown up with to change. Do you think anyone would develop an Aptera if gasoline was projected to be $.85 per gallon three years from now? It is better that the impetus for sustainability hits while we still have the resources to build better systems and can avoid absolute worst case scenarios. Ultimately there are still hard decisions that will have to be made such as how many people can the earth really support and how far are we willing to allow standards of living to fall and ecological damage to increase to accomodate increased numbers of people.

all true, higher oil prices are just a piece of the puzzle

Americans should develope energy independence for many reasons - it's sad that we only start to care when it hurts us financially

we can't wait for economically motivated private enterprise to do what needs to be done

many companies are working on alternative fuels - and guess what - they are being bought out by the oil industry - this is the inherent weakness of profit motive

Edited by abolitionist, 18 May 2008 - 04:33 AM.

[niner]

There are many reasons America is hurting but I don't know that high oil prices are among the foremost yet. Obviously the independent semi-truck drivers have been hurt as well as parts of the auto industry. In fact one of the hardest hit sectors thus far are the refineries and gas station operators. However gasoline in America has been less than half the price of Britain or Japan for decades and that's still the case. What is hurting Americans (and driving up the nominal price of oil) is the decline in the dollar. Of course it hurts those who HAVE dollars while being beneficial to those who on aggregate OWE dollars. Real inflation is the most politically acceptable way to lower real wages. Even if an employer gives cost-of-living increases each year pegged to the CPI they are effectively paying a lower salary if real inflation is higher than the CPI.

Wages in America have been falling in comparison to the rest of the world for quite some time and there's a ways to go to achieve parity. A major component of the elevated American standard of living after the advent of globalization was the willingness of foreign countries to accept USD as a reserve currency and not immediately exchange them for their local currency.

LSP, this is an excellent post. I'll note that the CPI has been underestimating inflation for a long time now (they exclude most of the things that go up the most... go figure) but that is part of "the plan". One of the ways we are dealing with Social Security funding problems and a general inability to impose taxes, along with our gargantuan national debt, is to inflate our way out of it. Some Republican op-ed writer in the Wall Street Journal recently called publicly for the US to inflate its way out of the latest credit crisis, too. I wish that I would have taken out a huge loan about 5 years ago and put the money into energy and precious metals. Mind, you had the right idea- I feel your pain. There's an ocean of liquidity out there (thanks, Alan "Bubbles" Greenspan) and a lot of it has sloshed into the commodity arena.

[niner]

all true, higher oil prices are just a piece of the puzzle

Americans should develope energy independence for many reasons - it's sad that we only start to care when it hurts us financially

we can't wait for economically motivated private enterprise to do what needs to be done

many companies are working on alternative fuels - and guess what - they are being bought out by the oil industry

This is the free market at work. We might have had things turn out differently; that would have required vision and leadership, two elements that have been lacking lately. It might have required a little bit of pain earlier to avoid a lot of pain later, but only grownups can deal with that. At the moment, I have a hard time seeing Ford and Chrysler surviving in North America. GM looks like they might pull through. They've seen the light, and are pushing hard on some fairly decent technology. The oil companies know that they are a Sunset Industry. I know people who work there and they say as much. That's why they are buying alternatives; they want to stay in business. They certainly have a lot of money to play with, between the massive profits they've been making lately and the enormous "tax incentives" we've handed them of late.

[Cyberbrain]

Oil soars over $135!!

[niner]

Oil soars over $135!!

But it took 17 days to get there from $120; hey, that's less than a dollar a day! As George Bush the first said, "Don't worry, be happy." Here's what not to expect to hear from John McCain: "Are you better off now than you were four years ago?"

[lunarsolarpower]

Several years ago I decided that while core CPI might consist of a weighted basket minus food and energy I wanted my own measure of inflation. I settled on the simple combination of the price of room, board and tuition at a little-known private college + the price for a gallon of regular unleaded gasoline. Even by that measure oil is actually out-pacing inflation. We'll see if it can last though. I suspect gasoline prices will shortly shoot through $4.00 and they won't look back for a LONG TIME or quite possibly ever.

[Mind]

We might have had things turn out differently; that would have required vision and leadership, two elements that have been lacking lately.

Lacking from both parties. Dems were ecstatic to pass the latest ethanol support package and continue to push for government measures to artificially lower the price of gas and oil (and thus prolong our dependence on it).

[jerpoint]

Anyone have a feel for where the real “point of pain” is for consumers?

I drove up through Minneapolis this morning and was watching for new models of cars.

People may be complaining about the cost of gas, but it sure isn’t being reflected in their choice of vehicles or driving habits. Large SUVs and sedans with poor gas-mileage still seem to be the cars of choice.

[niner]

Anyone have a feel for where the real “point of pain” is for consumers?

I drove up through Minneapolis this morning and was watching for new models of cars.

People may be complaining about the cost of gas, but it sure isn’t being reflected in their choice of vehicles or driving habits. Large SUVs and sedans with poor gas-mileage still seem to be the cars of choice.

This latest price increase has come so fast, I don't think you can see the results on the street yet. What you can see is GM and now Ford announcing cutbacks in truck and SUV production, and the bottom falling out of the used SUV market. On the other hand, clapped out old Geo Metros, Subaru Justys, and other such wretched nanocars are now commanding a premium. I hear that little motorscooters are all the rage, and people claim to be riding more bicycles, though I'm not seeing it where I live. That makes it sound like just as China is becoming more like America, we are becoming more like them.

On the other hand, most people are probably doing what I'm doing, which is to continue to drive my old car even though I'm spending more on gas. I drive less than I used to, but that's about it. My per mile cost of driving is cheaper this way than if I bought a new car with good mileage. I'd also like to wait a couple years and get a really nice plugin hybrid if possible.

[niner]

Several years ago I decided that while core CPI might consist of a weighted basket minus food and energy I wanted my own measure of inflation. I settled on the simple combination of the price of room, board and tuition at a little-known private college + the price for a gallon of regular unleaded gasoline. Even by that measure oil is actually out-pacing inflation. We'll see if it can last though. I suspect gasoline prices will shortly shoot through $4.00 and they won't look back for a LONG TIME or quite possibly ever.

Some years back they changed the way the CPI was computed. If you use the old way, inflation is running at something like 11%. With the new way, it's more like 4%. If you take away all the things that are increasing in price, like food, housing, energy, tuition, then inflation's not too bad. Actually, housing is going down now, but some people are not so crazy about that. Can't use 'em as ATMs any more...

[jerpoint]

Anyone have a feel for where the real “point of pain” is for consumers?

I drove up through Minneapolis this morning and was watching for new models of cars.

People may be complaining about the cost of gas, but it sure isn’t being reflected in their choice of vehicles or driving habits. Large SUVs and sedans with poor gas-mileage still seem to be the cars of choice.

This latest price increase has come so fast, I don't think you can see the results on the street yet. What you can see is GM and now Ford announcing cutbacks in truck and SUV production, and the bottom falling out of the used SUV market. On the other hand, clapped out old Geo Metros, Subaru Justys, and other such wretched nanocars are now commanding a premium. I hear that little motorscooters are all the rage, and people claim to be riding more bicycles, though I'm not seeing it where I live. That makes it sound like just as China is becoming more like America, we are becoming more like them.

On the other hand, most people are probably doing what I'm doing, which is to continue to drive my old car even though I'm spending more on gas. I drive less than I used to, but that's about it. My per mile cost of driving is cheaper this way than if I bought a new car with good mileage. I'd also like to wait a couple years and get a really nice plugin hybrid if possible.

I think you are right Niner. I spoke too soon.

I went to visit my family in Wisconsin over the Holiday weekend. I visited some more rural areas where the economy isn’t doing so well. Many people had large trucks and boats for sale in their front yards. It sounds like the truck dealerships are having an awful time selling their existing inventory.

Meanwhile, my mother is working hard to keep her Geo Metro running. I was forced to take back all of the mean things I have ever said about her car.

[Lazarus Long]

I will try very, very hard not to say "I told you so" because it serves little purpose except making me feel better about all the grief I have gotten for trying to explain Peak Oil and the sideways looks I got for making my family weekly MPG average go into the 40's. "Denial is not a river."

OK feeling good about being right is reason enough, "I told you all so."

Ironically I do not think the current situation is really about fair market factors or supply and demand; I think it is very much about commodity market manipulation, cartel price fixing, reduced refining in the US, and fear mongering. I say ironic because I think the very same economic interests that have denied peak oil for so long have figured out how to manipulate a generally ignorant public in denial and make a huge windfall profit that they are NOT putting back into real R&D in any significant way compared to before but are pocketing.

The real price for oil per barrel right now should be anywhere from $60 to $80 dollars a barrel at the most. Total global demand has not gone up the nearly 100% in one year that the price per barrel has. Also while total production and refinement has been flat and not gone down US consumption has begun to drop significantly with the current price rise and now we are in a waiting game to see when the bubble bursts or when the oil markets can force the US public to accept a new reality and try to return to their daily routines.

We are already seeing ripple effects through the economy as travel this summer appears to be significantly down and not just fuel consumption for cars, but boats, RV's, ATV's as well and all forms of the tourism and travel industry is taking a double hit as ticket sales drop.

The present situation could be explained if the real price of oil had been suppressed the last few years through price supports and they suddenly disappeared. Some of which do exist but not in sufficient quantity to explain what we are seeing in the marketplace, nor were they removed. Anyway such price supports help validate the argument that it is not really a free market at work anyway.

The argument about ANWR and other sensitive off shore drilling for oil right now that the administration is using to try and get these through based on fear manipulation and economic anxiety can be countered with a number of overriding arguments:

1. The oil developed in these sensitive regions will not go exclusively to the US market and in fact will go to the global one, where much of it will be bought at current pricing by China and India.

2. The actual amount of barrels when viewed in terms of global consumption is a drop in the bucket and will have no lasting impact on current trends. In fact it couldn't even be pumped soon enough to have ANY impact for a year or more and would take 5 years to be pushed to maximum output. At which time the level of production probably won't be maintained for 15 years, if that.

3. At present price rises the asset is earning more value in the ground than developed. Consider it a form of banking oil as a strategic reserve, with interest. Consider it a 21st Century form of gold in Ft. Knox to strengthen the dollar, which needs it, especially to help stabilize the real price of oil.

4. As the real base price of oil reaches the present market value and higher the development of those reserves will be made safer and more cost effective to be in accord with the more valuable commodity being developed.

The present is the time to develop alternatives to oil and many have started down this path already.

One big advantage to alternative energy production is that many of the facilities for providing it can be up and running in months compared with the years and decades required for large scale coal, nuclear and other large scale fossil fuel plants.

Oil rises despite falling demand

Dollar up on oil's fall

[PWAIN]

The real price for oil per barrel right now should be anywhere from $60 to $80 dollars a barrel at the most. Total global demand has not gone up the nearly 100% in one year that the price per barrel has.

This arguement is wrong, demand does not have to go up 100% for a price doubling. Even exceeding demand by 1% can chalk up the price by 100% if the resource is valueable enough.

Eg. Enough food exists for 100 people (no other sources available). 101 people are bidding for this food and you are one of those people. How much would you be prepared to pay for your life.

It may not be life and death, but oil is extreemly valuable - way beyond current pricing.

[Athanasios]

I agree with this part:

The real price for oil per barrel right now should be anywhere from $60 to $80 dollars a barrel at the most.

There is manipulation and individuals are speculating; however, the speculation is seen as institutional buying because individuals are doing it through new bank accounts.

[Lazarus Long]

resvhead

QUOTE (Lazarus Long @ 28-May 2008, 07:42 AM) *
The real price for oil per barrel right now should be anywhere from $60 to $80 dollars a barrel at the most. Total global demand has not gone up the nearly 100% in one year that the price per barrel has.

This arguement is wrong, demand does not have to go up 100% for a price doubling. Even exceeding demand by 1% can chalk up the price by 100% if the resource is valueable enough.

Basically you are correct and I should be more careful how I phrase the matter but the fact is that supply has not diminished and demand is down in the US not up. It is already projected that demand has dropped 1% this year and may even fall much further yet. We have now seen the biggest drop off in oil consumption since 1991 and some analysts are predicting as much as a 2% or 3% drop when the figures are totaled for this year.

By following your logic there would be a drop off of almost half the price at the pump yet the inverse is happening. The point is that the US is not exceeding demand domestically (yet) and global demand is being pushed by speculation that it will. So many institutional buyers, industries, and nations are hedging their bets (think hedge funds) and either stockpiling the actual reserves or buying futures that are driving up prices.

The cartels have been slowly reducing output too and not because they can't pump the oil but for the reasons I said before, it is worth more in the ground right now with the present run up in price.

In fact the price of oil is not just cooling off the US economy at the moment but is triggering ripple effects around the world that are about to cool off most economies, including China, which is running 15% inflation by most estimates. BTW the US inflation rate is also being manipulated and when adjusted is probably closer to 8% or 9% rather than the official 4%.

However, the conditions are also getting ripe for shorting oil and soon we may see a bubble burst but it won't help consumers because when the price per barrel has risen lately, the price at the pump rose within 24 hours but it takes weeks for a downturn in the price of crude to translate into a real drop in prices. The drop off in demand is having a more profound effect and ironically the local gas franchises are getting squeezed in the middle. Has everyone noticed the steady disappearance of independent stations recently over the last year?

Due to the credit crunch most suppliers moved from a 30 to 60 day credit payment structure to a COD one and the businesses are going broke. This is reducing competition even as the demand is dropping and supply is not. There has been no reduction in real supply (like post Katrina) and presently all demand is being met on the same level as last year and before.

We are likely in a peak condition but that is a flat step for now and the price is not reflecting real market conditions.

[Lazarus Long]

Also the large oil conglomerates and cartels are taking stock of what they have and attempting to manipulate pricing to find the optimum price they can get without triggering a global depression. However they are willing to help force a recession.

[niner]

3. At present price rises the asset is earning more value in the ground than developed. Consider it a form of banking oil as a strategic reserve, with interest. Consider it a 21st Century form of gold in Ft. Knox to strengthen the dollar, which needs it, especially to help stabilize the real price of oil.

Laz, this is a brilliant point that I had not thought of. I'm not so sure about the 'with interest' part (where would it come from?). Until recently we had been filling our strategic petroleum reserve with exceptionally expensive oil. Bush wanted to continue doing it but Congress finally put a stop to it.

Resvhead is right about the price. Demand for oil is relatively inelastic, i.e. the demand changes very little as price rises. Part of the reason for the inelasticity is that it is not very easy to store oil in quantities that are large compared to the rate at which the world uses it; One Thousand Barrels a Second. That said, commodity speculation and the weak dollar are also contributing to the price rise. Welcome to the future... I saw a guy on the street today riding what looked like a Razor Scooter with a Weed Wacker engine on it. Right here in Mumbai, USA.

[Lazarus Long]

Laz, this is a brilliant point that I had not thought of. I'm not so sure about the 'with interest' part (where would it come from?). Until recently we had been filling our strategic petroleum reserve with exceptionally expensive oil. Bush wanted to continue doing it but Congress finally put a stop to it.

The capital gains on the price rise.

Why would I sell you a product today at 1$ when I know that I can hold out for a week or two and get 2$?

That is a capital gain on my commodity of 100% over a very short time frame. Also in terms of the larger long term period of holding I called it interest rather than a capital gain because the value is increasing while not producing, like interest. Though since that value is generally realized at sale perhaps it would be better to compare it to a capital gain than interest.

However in terms of the value of the dollar this aspect is driving both the trading value of the dollar AND the domestic as well as international inflation rate; so in a sense, oil is a hedge against inflation because it gains in value faster than inflation so I was using the term "interest" to describe its increase in value and measure apples with apples for its growth value percent and the inflation rate that adjusts it and is balanced against it.

As the amount of oil in our strategic reserve increases proportionally to our economic demand it also drives the value of the dollar up, increasing our buying power for global supplies. This process accelerates in effect when we include a move to a post oil economy increasing our domestic energy independence. Most large industrial economic sectors and nations that move to alternatives energy source and self sufficiency will see the economic impact of that independence in the form of increased value for their currency or profit on their products. Consider that a form of interest too.

[Lazarus Long]

Resvhead is right about the price. Demand for oil is relatively inelastic, i.e. the demand changes very little as price rises. Part of the reason for the inelasticity is that it is not very easy to store oil in quantities that are large compared to the rate at which the world uses it; One Thousand Barrels a Second. That said, commodity speculation and the weak dollar are also contributing to the price rise. Welcome to the future... I saw a guy on the street today riding what looked like a Razor Scooter with a Weed Wacker engine on it. Right here in Mumbai, USA.

I basically agree with both you and Revshead and was writing that reply above probably while you were writing yours.

[Lazarus Long]

Another point.

Today DOW Chemical announced an unprecedented 20% across the board price increase on ALL its products with only a 4 day notice. They are the first major supplier for that industrial sector to do so but they certainly will not be the last.

They flatly blame the global price of oil as virtually everything they make depends on it

This will impact all subsequent products made with those ingredients from pharmaceuticals to fertilizer, not to mention styrofoam packing and plastic packaging.

Food is fuel and it is about to follow oil up in price and actually has been for the last year, which is why there are food riots in many nations already.

The transportation industry can't adjust prices fast enough to meet the rate at which fuel prices are rising.

Aside from the large scale passenger transports the real issue will soon be the fall off in competition for over the road hauling of freight as the independent operators are squeezed out of business and only the large haulers are left. Prices have risen so fast on diesel that many operators have signed shipping contracts that they are now losing money on. They cannot back charge fuel surcharges in most cases and the impact to the trucking industry may be startling to many by next winter.

We are not just facing *stagflation*, the Fed is trying to hold back run away inflation that could trigger a global depression, not just a domestic downturn. That will definitely reduce demand for oil and that is why Bush was on his knees before the Saudis trying to get them to increase output. They are doing a cost/benefit analysis on the options and will get back to him.

The global commodities markets are not just becoming *unstable,* they are about to get *unhinged.* Prices on many things are going to skyrocket right now but global economic impacts could so adversely disrupt markets and eliminate buyers or destroy production or delivery infrastructures that it creates panic sell offs and dramatic losses as well as incredible windfall profits.

People that do this right make money whether the market goes up or down. The majority of people lose their shirts like in Vegas, the odds always favor the house.

[lunarsolarpower]

We are not just facing *stagflation*, the Fed is trying to hold back run away inflation that could trigger a global depression, not just a domestic downturn.

I don't see the Fed doing much to fight inflation yet. They're far more worried about the impending derivative meltdown as evidenced by their bail-out of Bear Stearns and current exchange of US Treasuries for any nominal assets any commercial bank brings them. The fact that the dollar is being destroyed in the process appears to be the lesser of the two evils of allowing all over-leveraged financial entities to implode causing commerce to grind to a halt. It really sucks for the average American who has little to no exposure to non-dollar denominated assets.

Several effects of this process: increasing commodity prices, falling real wages, a lessened decline in real estate prices. The party (Americans making 10x more than similarly educated and motivated workers elsewhere) had to end eventually and I think this is just the beginning. Those who will suffer the most are those who already are suffering the most - the poorest 2 billion.

[niner]

Several effects of this process: increasing commodity prices, falling real wages, a lessened decline in real estate prices. The party (Americans making 10x more than similarly educated and motivated workers elsewhere) had to end eventually and I think this is just the beginning. Those who will suffer the most are those who already are suffering the most - the poorest 2 billion.

It also disproportionately hurts those people who had the incredibly bad judgement to have money (USD) in the bank and no debt. When George Bush told us to "go shopping" for the war effort, I should have listened... If you're in debt up to your ears, relax, you'll be paying it off in cheaper dollars.

[anderl]

I'd like to point out that oil is a time sensitive commodity. Consumers of oil, mostly refiners, find it in their best interest to convert the oil into a higher stage product and get it out the door rather than to store it. Mostly because holding inventory costs money and refiners have a very small profit margin on oil relative to others in the supply chain. Large clients such as distributors and transportation companies like UPS and FedEx don't just buy the spot gasoline you and I pay at the pumps. They buy future contracts. They estimate what they expect to use next month, or quarter or year and buy approximately that much with a scheduled delivery near their estimated time of use. Any additional needs are bought on the spot market, straight from the pumps.

With the huge economic expansion across the globe, new business have been cropping up left and right and they have been buying their expected future usage. Suppliers announce what they will produce and put those contracts out onto the market for each months going out a few years. These big clients buy up those contracts. The problem is that when expected demand is higher that what the suppliers can put out on the market the price goes up on the contracts that are already in the market. So some client might sell their contracts to others and look to reduce their consumption that month other buy up some contracts earlier or later or just hope for the best that the spot market will be lower when the time comes. Typically large clients like airlines, or transport companies buy contracts out 3-5 years in advance.

That is what happened between 2001-2005. Contracts were being bought up faster that suppliers could put them into the market. Seeing that even the smallest orders could move price dramatically because there was little supply left, traders jump int to try to capitalize on the anomaly in the market. Sometime they win sometimes they lose.

A case in point is when Amaranth Advisors tried to do that with $9 billion in assets to try to profit from the weak supply growth. They bet wrong and ended up blowing up the entire hedge fund. It was forced to liquidate all its assets on the open market in the summer/fall of 2006. That drove oil prices from $80 a barrel to $50. Seeing an advantage a lot of companies secured future contracts 3-5 years out again drying up even more future production.

So if you are all wondering why we went from $50 to $145 in a little over a year it is due to massive hedging of future contracts by big corporate consumers 3-5 years out. The volatile day to day moves are due to speculators but it is a bunch of bull that they created this mess.

[Cyberbrain]

Oil breaks new ground above $143

[niner]

Anderl, thanks for an informative post. Also thanks to Kostas for the graphic showing the price of oil with respect to geopolitical events. It might be interesting to plot the recent price of oil against interest rates on the USD. Lately it seems like the fluctuations in oil are highly correlated to Fed actions. Like the other commodity bubbles, oil is responding to the flood of liquidity sloshing around out there.