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Bloomberg.com: Energy — When you start to see stories like this it means it will never happen and the bottom is near. It may be there now. This was exemplified by all the $200 a barrel predictions followed by a plummet. Give it a couple more weeks. Supply and demand, HAR! And never overlook the fact that oil trades at a relative $25 forever. While the experts predict eventual upward price swings, history indicates the opposite.
Oil traders made their biggest bet yet that the Organization of Petroleum Exporting Countries will fail to prevent crude prices from plunging below $30 a barrel. Trades in crude-oil options contracts that would allow the holder to sell oil for February delivery at $30 a barrel reached 1,407 on the New York Mercantile Exchange yesterday, making the contract the day’s second-most active, exchange data show.
OPEC, the supplier of about 40 percent of the world’s oil, plans to meet Nov. 29 in Cairo to discuss another output cut after crude oil touched $54.67 a barrel, a 21-month low, yesterday. The 13-member organization cut production by 1.5 million barrels a day at a meeting in Vienna last month.
“Somebody is buying a little bit of insurance with a very deep out-of-the-money put option,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “It’s very exciting to think about $30 oil, but are we going there? Most likely not.”
Under $100/barrel for oil and Canadas’ tar sands aren’t economically viable.
#4 Not enough yet, unfortunately. At least in the case of Venezuela. But it’s getting there. Next year’s budget was calculated with an oil price of 50 and it’s already around 46 and counting. And the state’s oil company is so much in debt that no one wants to extend credit to them.
Regardless, we are still paying all of cuba’s current season post-hurricanes rebuild. The congress just approved a 21.77 billion U.S. $ in help. All of this while the countrie’s infrastructure is rotting fast and no one is doing a thing.
This can hint you about two things: 1) If you think venezuela is not run by cuba, think again. 2) What a bunch of sleazebags, freeloaders and ignorant voters can do to a country.
#20 Some of this was done by retrofitting some power plants to do that with modified heavy crude oil. Venezuela (when it was something closer to a real country, not the mess it is today), created something called Orimulsion. http://tinyurl.com/6kmjx8
Some countries were even convinced to switch their power plants to Orimulsion with the promise of low cost constant and reliable supply. Then, the current jackass-in-power killed the thing, most likely ordered by cuba to do so.
I can imagine the faces of the people in those countries who fell for this thing just to be burned by chavez with his decision to let ‘em hanging.
#22 Green
The oil sands extraction process makes money at $35-40 a barrel for the companies with established, productive operations.
It was the price of oil that broke the economy. When the price of fuel slowed the economy people on the edge couldn’t pay their loans. Then all the new houses couldn’t be sold. Then the carpenters couldn’t get jobs building so they quit buying cars. And the laid off auto workers stopped going to Disney World. And … until we ended up in the mess we are today.
Our economy is based upon oil. Until recently oil was inexpensive and a relatively good way to hold energy. To get off of oil will require replacing it with something equally transportable. Whether that is high density capacitors or batteries or liquefied natural gas or propane I can’t answer. But it won’t be $150 or $200 /bbl oil.
The real problem with these enormous price fluctuations is that neither business nor consumers know what to expect, leading everyone to make bad decisions.
One way to get rid of these fluctuations would be for the government to put a floor on the price of oil. Pick a number, $70/bbl, $100/bbl, whatever.
Then tax oil whenever the price drops below that price to keep it at that price. That would create some stability so that people would know that buying that prius really is better than buying that naggravator.
Businesses would know that buying insulation for their buildings to cut their heating costs pays.
It would take a tremendous amount of uncertainty out of the market by at least limiting some of the price swings.
Business hates uncertainty.
Consumers should hate it too. It caused people to end up filling their SUV tanks at %$4/gallon. And, if we let the price drop again for a while, it will cause the same thing again.
We the idiots will not do something just because it makes sense. It has to be the best choice for our wallets too. I have no idea why that is, but it is.
Anyone could have known (and everyone should have) that buying fuel efficient vehicles was a smart thing to do. We’ve known that since 1973. And yet …
Gee, just a few months ago everyone was predicting $200 for a barrel of oil and now it’s $30. It will decline just a hair below $50 and then begin it’s assent again toward $100 before fluctuating between those two numbers for a while. Then it will shoot up to $250 much like it went to $160 before collapsing well below the $50 mark.
I don’t claim to have a crystal ball, I use a map. It’s called history.
#25 – Mr. Fusion
Re: “It was the price of oil that broke the economy.” Are you kidding me!!?
It was GOVERNMENT forcing banks to make home loans to people who didn’t qualified that crashed the economy.
The depression was going to happen but with GOVERNMENTS’ help it will be much much much worse.
Oil prices too high = Republicans f@#king us with free market policy.
Oil prices too low = Democrats f#@king us with want to add on more taxes and not invest in national refineries and drilling.
Either way we always get f#@ked!
“Heralding a possible fresh cut in output, Naumam Barakat, of Macquarie Bank in New York, said that the latest downward revision seemed to indicate that Opec would like to withdraw another 1m b/d on top of the 1.5m b/d that the cartel cut about a month ago.
“If crude prices do not hold these price levels, the next test could be all the way down to the 2007 lows of $49.90 a barrel,” he said.” FT.com
Some say it could go back to the 100 range. The trend is down because we see the economic harm when it gets to those levels. It can’t keep enough demand at 100 to keep volume alive and the system lives off of volume.
They are talking about cutting volume now to support rising prices. I guess you could say that price fixing does not work. Killing volume to support higher prices kills prices because volume drops, so demand naturally doesn’t go higher. They need to sell more to make more. It’s like trying to keep a newspaper going by announcing that you are going to print less papers and charge more for the papers. You need to sell as much as people will buy at a price they can afford. A newspaper is 50 cents. If it was a dollar, circulation would drop. It’s dropping now and it’s dirt cheap. Oil was 140 and a paper was still 50 cents. The delivery costs created losses for the newspaper business. I guess at 50, it’s a 50-50 solution. Read the problems and prove them as originals.
On the price floor, wait for the dead cat bounce. On the artificial floor set by the government (#26 Scott), this is equivalent to the carbon tax which is supposed to encourage the sustained investment in green technologies.
It’s an interesting idea. Germany guaranteed a price for electricity so small producers could borrow the money to get into market. Currently they are on track to produce 20% of their electricity from renewable energy, mainly solar.
#27 You forgot to add how much cheating the opec members incur. Whenever there’s a new production goal, be it up or down, some members say yes but in reality they start producing more than their accepted quota.
Regardless, due to the current economic situation, that new 1 to 1.5 million barrels cut they plan to do will achieve nothing.
Pedro is right. Somebody will game the system to gain, while the others will cut and cut their own numbers down. People want more for less, it’s just human nature.
“However, inefficiency should not be associated with immorality. A utility function for a player is supposed to represent everything that player cares about, which may be anything at all. As we have described the situation of our prisoners they do indeed care only about their own relative prison sentences, but there is nothing essential in this. What makes a game an instance of the PD is strictly and only its payoff structure. Thus we could have two Mother Theresa types here, both of whom care little for themselves and wish only to feed starving children. But suppose the original Mother Theresa wishes to feed the children of Calcutta while Mother Juanita wishes to feed the children of Bogota. And suppose that the international aid agency will maximize its donation if the two saints nominate the same city, will give the second-highest amount if they nominate each others’ cities, and the lowest amount if they each nominate their own city. Our saints are in a PD here, though hardly selfish or unconcerned with the social good.
To return to our prisoners, suppose that, contrary to our assumptions, they do value each other’s well-being as well as their own. In that case, this must be reflected in their utility functions, and hence in their payoffs. If their payoff structures are changed, they will no longer be in a PD. But all this shows is that not every possible situation is a PD; it does not show that the threat of inefficient outcomes is a special artifact of selfishness. It is the logic of the prisoners’ situation, not their psychology, that traps them in the inefficient outcome, and if that really is their situation then they are stuck in it (barring further complications to be discussed below). Agents who wish to avoid inefficient outcomes are best advised to prevent certain games from arising; the defender of the possibility of hyper-rationality is really proposing that they try to dig themselves out of such games by turning themselves into different kinds of agents.”
http://plato.stanford.edu/entries/game-theory/#IP
Price fixing ensures inefficient outcomes because markets are avoided or subverted to control that which is best left to markets. Oil at $140.00 clearly did not produce good results and oil at $40.00 is a result of market efficiency. The price fixing puts the consumer in a PD and prisoners do not make good consumers, so prices collapse. $40.00 a barrel is better for the consumers and there are more consumers voting than there are cartel members manipulating prices. People vote with their wallets so they will always win in the long-term. Winning consumers ensure winning suppliers. Demand will be met because there’s no shortage of oil, only a synthetic shortage. Let’s create shortages and then charge prices as if they are real. Stupid strategy. Oil is good and plenty, so it should not be inflated to reduce demand while raising prices. That will produce huge losses as recent history has proven. Gasoline should be under $2.00 a gallon soon, which will reduce price pressure on foods and other commodities which depend on fuel to get to market. Great news for older people on fixed incomes, some of which have seen huge ($2 trillion estimate) losses in retirement investments thanks to Wall Street shenanigans. The government is giving Wall Street more cash for more shenanigans. They’re bailing out the same people who gamed the system and lost. They’re rewarding immoral behavior. Wall Street was efficient, just not moral. The bailout is neither, because the market produces winners and losers without prejudice. You win some, you lose some. With gas at two bucks a gallon, you can’t complain.
Yes OPEC members will cheat any production cuts especially with revenue falling.
Also, Iran hasn’t acted up in awhile, so some of the war premium has disappeared.
I would say $45 is the right price, and perhaps things will shoot past that with so much extra production coming on line.
By the way what does the $30 price in the article mean? Is the seller required to sell at that price, or is he merely guaranteed a buyer if he chooses to sell?
#25, that doesn’t prevent fluctuations above your price floor. You just don’t like cheap oil.
To prevent fluctuations, they should fix the dollar to gold, and it would add some stability.
Meanwhile, OPEC president says he sees a production cut unlikely.
http://tinyurl.com/6hz26q
Oops, clicked too soon.
The reasons he cites is the failure of OPEC members to uphold the previous production cuts goal.
Ha!
If oil and gas rise it will have more to do with artificially low interest rates, deficit spending and industry bailouts and other inflationary practices.
If alternative energy gains traction, it will drive oil and gas prices down. This will unhinge the greenies because each time oil and gas go down, it makes alternatives less advantageous, economically speaking.
Only for you ECON grads out there:
And why do we call it the line of equilibrium? Because a horse isn’t a horse of course!
#26, Confederate Traitor,
#25 – Mr. Fusion
Re: “It was the price of oil that broke the economy.” Are you kidding me!!?
It was GOVERNMENT forcing banks to make home loans to people who didn’t qualified that crashed the economy.
Can you provide a link (other than Rush Limbaugh or O’Reilly) that shows the government “forced” banks to make loans? Not that they couldn’t discriminate in their loans, but that they had to make loans to unqualified people that they wouldn’t make to other people. Then provide some numbers that lower income people are in a higher default rate than other borrowers.
Until then shut the eff up with the “government forcing those nice bankers to make loans they didn’t want to”.
The anti-discrimination push was the very force he is talking about. The government claimed that banks weren’t lending to minorities, while the banks decided they were not as credit-worthy and others decided was racism. But of course you knew that already.
#24 Mr. Fusion
Nailed It. I would go back one step further, though. Supporting our out of control government spending requires smokin’ hot GDP growth. So the Fed responded to political pressure by turning up the oven and now we’re (over) cooked.