Platy

I disagree. The oil trading system is set up so that every month the expiring contracts settle at the current spot price. This is almost pure supply and demand.

The only possibility that allows for manipulation of the spot market price is if investors can somehow buy a significant amount of oil and store it away, thus reducing the supply and increasing the demand. (For an example of this, think of how de Beers & Co keeps prices high in the diamond trade.) But for this to happen with oil, investors would have to be buying and storing away real oil on a scale much larger than for example the U.S. and Chinese strategic petroleum reserve programs. I'd imagine that if this were happening, there would be at least a few rumors circulating about the existence and nature of such huge operations.

gwd

Platy, I don't get this. I worked in Petroleum and the people I worked with (DOD) had yearly contracts, quite complicated but they only bought at the spot price when something unforeseen happend. Of course they have huge inventories. Lets see this wasn't the crude side this was the JP4, JP5 type stuff. I assumed the crude side was the same way, the refineries enter into contracts and go to the spot to buy or sell when something goes wrong. Sorry its not car free, oh yeah when I would visit the clients in Houston I would stay at a hotel where I could walk to work. Too bad Houston is so sprawled. I'd be the only person walking in that neighborhood just south of downtown. Well in the evening their were these worn out looking girls walking around but they'd end up getting in their boyfriends cars after a few minutes.

lksfirecapt

Roody,

The problem with California is so many people cannot envision getting out of their cars and using forms of mass transit. Thus the infastructure related to mass transit only makes small improvements from year to year.

The bigger issue at hand is not "how much my gasoline costs" but the global effect of using these forms of fuel. My first "reality check" that the environment was going to hell was the 2003 Cedar Fire. Never in my life could I have anticipated such a fire. Then it repeated itself in 2007 with the Witch and Harris fires.

If anyone tells you global warming is a lie have them come pull some hose with me in San Diego County...

Mark

Roody

I didn't mean to say that the oil market is being manipulated. I meant that I think some (maybe most) of the current rapid price increases are due to speculative purchasing rather than pure supply & demand. Investors are scared of future shortages of oil due to supply disruptions, so they're willing to pay more for current supplies. Add to this a measure of speculative investment--that is, betting that prices will continue to rise, ensuring big future earnings.

Is there any way that pure supply & demand can account for a 25 % jump in prices in barely two weeks, as we have just seen? I think s & d would usually trigger a slower rate of increases over a longer time frame?

(Obviously, you and others here know more than I do about economics, so I'm eagerly awaiting your thoughts on it.)

Roody

Areas that developed during the automobile era are Sprawl City. This includes most of the Sun Belt as well as suburban areas of other regions. If I were you, I'd get out. The next wave of migration will be away from the Sun Belt and back to the cooler regions that have lots of fresh water. Median home prices in my city (Lansing, MI) have dropped 26 % in the last year. Houses here are a tremendous bargain right now, and our carfree infrastructure is slowly improving in spite of the recession.

Platy

Sure. Actually, I think long term oil supply contracts that were entered years ago by refiners is what's keeping retail gas prices down around $4 instead of the $5-6 we'd expect if the refiners were paying spot prices. Similarly, some airlines have recently benefited greatly compared to their competition from long term hedging of their fuel costs.

However, long term contracts and hedges eventually run out. When they do, the new contracts will have to be closer to the prevailing spot price. That's why the refiners can hold out for only so long keeping retail gas prices low. Same for airlines, which face enormous fuel cost increases as their hedges expire.

I guess there's the possibility that most oil is currently being delivered under low priced long term contracts. If demand increases suddenly, that might spike the spot price up since most of the oil would already be spoken for. But I can't think of a way for spot prices to spike up so hard if there's plenty of supply or if demand goes lower.

Yes, the price of long dated oil futures factors in people's expectations about the supply and demand situation in, say, March 2011. However, as the March 2011 settlement date approaches, the contract price will start converging with the spot price. At expiration the final value of the contract should be very close to spot, which reflects actual supply and demand.

Normally, the present value of a long dated future contract is lower than spot. That's because if you bought now and stored the oil for a few years, the storage costs would be considerable and you would forgo interest on the money you've invested in storing the oil. This normal situation is referred to as backwardation. However - if people expect diminished future supplies or increased future demand, the price of long dated oil contracts will go up. That situation is called contango.

You can speculate about backwardation vs. contango in long dated futures, and this is the exact type of speculation you describe. However, it doesn't directly drive the current real price of actual oil. The investors who guess right about the supply/demand situation in March 2011 take money from those who guess wrong, and in the end in March 2011 the oil will change hands at the spot price.

I don't know. A market can get wild when inflexible demand bumps up against a hard limit on supply. It's Musical Chairs in real life. If people are willing to pay any price for gas but supply dictates that there's only supply for 99% of the buyers, something has to give. What's happening may be that gas prices have to go up really, really high to bring the demand down enough to fit the supply.

All this is just my amateur opinion. I have a busted prediction somewhere in the archives here about oil never reaching $100 a barrel because economic recession would reduce the demand. So you can factor that into your evaluation.

Economics isn't our focus on LCF and that is as it should be. On the other hand the discussions about bicycling on the economics and oil forums is equally rudimentary. So in writing this post, I have to ask forbearance from those who don't want to talk about fuel issues here. If you keep your ears open, though, you know it's Topic A around town and it's the lead story on the national news now.

Roody

Platy,
Thanks very much for the time and thought in your long reply. It helped me to understand a lot more about the issue. You should write textbooks, as you explain complex situations very clearly.

Platy

"Mr [Platy], you don't always get the right answers but you explain them so well!" - said to me by a student many years ago.

Roody

It seems that people's expectations about things other than supply and demand would also enter into this. For example if people thought their dollars were going to be worth less in 2011, they would be wise to hold stored oil (or oil futures) as an asset rather than dollars. And if people thought interest rates were going to remain low, they would want to hold oil and other commodities, rather than cash and securities, wouldn't they? So don't government fiscal and monetary policies directly affect the price of oil? It seems to me that the things the government is doing now to shore up the economy (weak dollar, tax rebates and low interest rates) will contribute to higher costs for oil and other commodities.

Platy

Well, we expect individuals to make their own economic decisions. And that comes right back to the topic of the thread, "What are you doing about it...? My opinion is that, right now, every random guy who figures out how to strap a milk crate to a rear rack is doing as much good for the country as the researcher plotting graphs in some office at the Department of Commerce.

gwd

I know researchers who plot graphs at Department of Commerce, and Ag. and etc. If you think Bush & co. is doing bad for the country then the guy with the milk crate is doing more good for the country, if you think the Bush policies are the best for the country then these guys are doing more. The gov. researchers are working to implement Bush policy. Sometimes they agree with it and sometimes they don't but its their job to push the Bush agenda so they do it.

bragi

How much of the rise in oil prices do you guys think can be attributed to the fall of the dollar? I'm pretty good at math, but, since I don't have the necessary background data, I can't figure it out myself. (Okay, I'm just too lazy to look it up.) I suspect, though, given the plunge of the Dollar over the last year or so, it's actually a significant factor. I don't see my EU relatives screaming nearly as loudly about pump prices as folks here at home.

Roody

I'm definitely NOT an economist, but from what I've read, not even the experts can quantify this with any certainty. But the weak dollar and expensive oil are interrelated, with each affecting the other, presumably. I think that one worry is that this is some kind of feedback loop that won't correct easily.

bragi

Unless they start trading oil in Euros instead of Dollars.

Roody

Saddam Hussein tried to do this and look what happened to him. Then Iran wanted to start a Euro market and all of a sudden Bush was ready to invade them. I have a feeling that Russia and Venezuela would be interested in a Euro plan like this also.

wahoonc

Part of it is perception...your EU relatives have been paying much higher prices due to taxes... a jump from $8 to $10 is a 25% increase vs a $2 to $4 jump which is a 100% increase, so of course the US is noticing it more. I can't find the article at the moment (it was posted on another thread) But one writer contends that gas in the US has been under priced for years. It is just now coming back to where it was back in the 20's and 30's in terms of a relationship to average income and a percentage of operating a car. But then again in the 20's a fair number of people didn't own cars.

Yes the devaluing dollar is playing a part in it too, a big part of what is leading to the speculation on the futures market. I am no economist so I can't really explain how it works...but my favorite quote on the futures market comes from former NY Governer LaGuardia..."ticker tape ain't pasta" In other words you can't eat futures but they can sure mess with the price of things like food.

Aaron

wahoonc

Hugo Chavez/Venezuela has been lobbying OPEC for just that. But the Saudis so far have kept heading him off at the pass.

Aaron

GreenPremier

I don't own a car.

Roody

This is very interesting, and IMO very much on topic for LCF. Do you see the rapid increase in gas prices as overall positive or negative for transition design? People sure don't feel "positive and included in the transformation" when it comes to the prices. They feel more like somebody is sitcking it to them, I think. I don't know if it's possible to transform those negative feelings, although for many of on this board, our love of bicycles makes us feel more positive about the future (and the present).

Let's say that to some extent the high oil/gas prices are a bubble that will eventually burst, and prices will go down again. Will that lessen interest in transition towns and similar ventures?

Roody

This might be the article you're thinking about, from Slate.com. Funny, I was just wondering if I should link that article here and you brought it up. Here's the lead-in to the article:

*



The whole article:

Gasoline Is Cheap
Four dollars a gallon is outrageous! We should be paying much more

cutman

I've been able to sell my girlfriend on riding the bus. Public transit gets a bad rap in the south, which is probably why she didn't ride it much before, but I think she appreciates the convenience and not having to park. That, and our round-trip fare makes economic sense compared to gas.

One of my coworkers said he and his wife were looking at moving closer to downtown so he could bike to work like I do, but they ended up choosing a place way out in the country. More house for the money I guess. I don't know. I've always preferred location over square footage.

wahoonc

Yep that was the article I was thinking of...

Another issue/factor that is wreaking havoc with a lot of things is the inability to accurately estimate fuel costs for the future. We used to include running our big diesel generators in the job overhead, they have now become a line item. Last project we sucked down over $18,000 worth of diesel and it definitely had an impact on the job costs and profit sharing.

Aaron

TuckertonRR

From what I understand, oil futures are a hedge against a falling dollar. And the dollar has been falling against other currencies (Can. $, Euro, GBP) since crude oil's rise.

lksfirecapt

In todays news they announced that Governor Schwarzenegger was going to divert money away from mass transit and trains to help balance the budget shortfall. You can't win here in California! Just when you jump on mass transit because of cost and environmental issues they go after mass transit?

darksiderising

Your truck will never be "paid for". Owning and operating your vehicle will still probably cost you around $15K per year on average.