The real reason gas & oil prices are so high (not a joke)...

[RoninLB]

oil is priced at the margin.



4/22/06
Premium gas @ $3.50 in L.A. area

Originally posted by RoninLB
.........
Right.. it does takes yrs to bring energy to market. But right now the oil commodities mkt's are as hot as Wall St in the 1920s. Basicaly as I see it the US is suppling the ME with party money. I'm a bit sure they'll overspend and have another banking/property/business crisis again. Our oil industry profits are meaningless in this issue imo.


slam away

[wludavid]

Originally posted by Noah
I'm not an economist, and I didn't stay at a Holiday Inn Express last night, but I don't think price increases track so closely with demand increases. Someone with a better economics background will hopefully speak up, but it seems to me that there are numerous economic examples in which a slight increase in demand resulted in a comparatively dramatic increase in price. The first example, incidentally, that comes to mind is the market for early 911S and RS Porsches. Early 911S values have roughly quadrupled in the past ten years (i.e., a near-mint, original 911S coupe that was worth $20K in 1996 sells for $80K today).

Have we seen, in the past ten years, a quadrupling of demand for early 911S's to account for the quadrupuling in price? I don't have any hard data, but my gut says no. Getting back to oil prices, I think the story is similar: small increases in demand cause large increases in price, especially in as tight and global a market as oil.

Terrific WSJ editorial today on the subject:

http://www.opinionjournal.com/editorial/feature.html?id=110008286

Noah, those kinds of things are exceptions and have to do with scarcity of the product (in this case 911S's in good shape). An inelastic commodity like oil is not scarce (yet) and therefore price should track demand nearly 1:1.

edit: Interesting point about ethanol made in the editorial...

[Porsche-O-Phile]

Excellent write-up. While I agree with the theoretical basis of your comments, I would disagree that oil is overvalued - I'm pushing a large percentage of my investments into energy and oil futures at the moment so at least I get SOMETHING out of getting screwed at the pump. . . I think prices are going one way - up. And it will remain that way for the foreseeable future.

[onewhippedpuppy]

Anyone happen to wonder why the oil companies are making record profits? Luckily they seem quite talented at paying off the right people, it's simply amazing to me the absolute silence you hear from the government on this issue, both Republican and Democrats.

[coldstart]

I'm not an economist (but I did stay at a Holiday Inn Express last night), and I agree with most of Wayne's reasoning.

However, the price is driven by a number of other factors, mainly potential. There is a perception, real or not, that there is a strong chance of a shortage of oil in the near future. This is based upon the situations in Iran (their president redefines the word 'tool') and Nigeria (can't we all just get along?). Canada isn't helping with our Newfie provincial PM Williams playing hardball to start the new Hebron offshore oil project (even though oil production would be years away, it would give another small but stable future oil source).

Speculators are driving the market and there is nothing we can do about it. Oil and gas companies are making huge money from this speculation right now. In the long run it will hurt them as people become more conscious of their gas use and opt for hybrids or smaller, more efficient cars or even maintain their existing cars better or G-d forbid-- drive less (I now take public transit to work, mainly for other reasons though). On the industry side of things, the prices force companies to look at different options. In the meantime, my oil stocks have been doing really really well

[speeder]

I think that there is no question that demand for oil products, (at least gasoline), will decrease slightly in the US as a result of current prices. And that consumers will mostly dump large, inefficient vehicles in favor of higher MPG ones. I know that I am making a conscious effort to use less because I can't stand to see so much of my household budget go to fuel and by extension to oil companies and countries that I don't like. I cannot believe that the great majority of consumers is not doing the same, whether they are green types who already were not wasting a lot or suburban people w/ speedboats, ATVs and large trucks.

In places like Europe where they were not wasting a lot of gasol ine to start with there is less room for a reduction in demand, but in the US it could be significant and we are the world's biggest consumers of oil. Also, I believe that the change in vehicle type will be permanent for most of the population, even if prices drop a little. We have had a situation due to artificially cheap pump prices and clever marketing by the auto industry where ~half of the population of the US and parts of Canada were driving huge tanks for normal, everyday transportation. It was really an unprecedented era of wastefulness, even in the '50s and '60s when gas was cheap and plentiful it did not compare. It was the equivalent of 1/2 of all households driving a new Cadillac Fleetwood because "I like sitting high/the feel of safety/etc.. And that half would include nearly all of the people living a suburban lifestyle that means lots of miles driven daily and zero public transportation.

The middle class, (what's left of it), has been largely moved out to the exurbs in the great "build-out" of American cities and they will be buying cars that get a minimum of double the MPG of large SUVs, plus driving less. Oil demand will fall in the short term, long term demand is up to whether we have politicians smart enough to look out for our long-term interests and have a cogent energy policy that reduces the need for imported oil.

[turbo6bar]

The oil market is driven by speculation and fear. Oil could go up another 40% OR it could go down 40%. Now would be a good time to take some profits off the table. Betting on further increases in oil would be betting on a global slowdown or recession.

[gaijindabe]

Originally posted by coldstart


Speculators are driving the market and there is nothing we can do about it.

Anyone can buy crude oil futures or gasoline futures (or sell them) and take profit (or loss) from falling or rising prices.

How do these "speculators" drive the market? And how can I too? I would not mind making a few extra bucks..

[sammyg2]

Careful Wayne, I've posted almost the same argument many times (without the big words) and got flamed by the tinfoil hat-wearing population on this board (Matt's post is a good example).

Some folks don't want to hear the complicated truth, they want to hear a simple conspiracy theory that has absolutely no basis or support.
For some reason it is comforting to them to think that a few bad men are to blame, not a complicated economic system.

[turbo6bar]

Speculators drive the market by buying options and futures with expectations of further increases. On a larger scale, large trading houses and hedge funds trade derivatives.

Speculators can drive up condo prices to ridiculous levels and they can do the same for commodities.

As RoninLB said, the market is set at the margin.

[kach22i]

War or the threat of war increases speculation and drives up the price of oil.

The oil companies with record profits have done nothing to drive speculation and commodity exchanges? Who do you think buys and sells most of the oil on wall street anyway?

We are being played.

[Porsche-O-Phile]

Originally posted by turbo6bar
The oil market is driven by speculation and fear. Oil could go up another 40% OR it could go down 40%. Now would be a good time to take some profits off the table. Betting on further increases in oil would be betting on a global slowdown or recession.

Interesting side-note: try substituting "housing" for "oil" and "regional" for "global" in the above passage. It still makes sense. . .

Back to the topic at-hand. . .

This happens every time the gas prices go up and it seems to happen every year at the start of summer and again right before Labor Day and a little bit before the winter holidays. Every time, people scream and yell about price gouging and you get the "we're-mad-as-hell-and-not-going-to-take-it-anymore" vibe from the comments here on the Internet and at coffee shops, watercooler, etc. Nothing ever happens. People have a retarded attention span and after a couple of weeks they'll get numb to it, find something new to complain about and fork over the new asking price without really grumbling about it. Sorry to over-simplify this, but obviously this is what the oil companies count on and they're clearly positioning themselves to take advantage of it (yes, I agree a lot of this pricing is deliberate and the result of some fixing going on, although not so much to REALLY overvalue the product that much).

Bottom line is in a few weeks people will be right back to driving (and buying) their H2s and simply forking over the green on demand. Any talk of meaningful forays into alternative energy are academic discussions at best and laughable in the context of a consumption-driven, oil-baron-led American society at worst. Sadly. The individual or society that survives long-term is the one that PRODUCES, not the one that consumes. Our economy is almost entirely based on consumption right now and the attitude towards oil reflects it. We don't value money, we value spending. Big difference. China knows better.

[Rich76_911s]

I think the biggest sell signal in Oil is that almost anyone you talk to will tell you that it is never going to go down again. Infact if you polled people on what they think oil will be closer to costing in 2008 $50 or $100 a barrel, I would bet over 90% would say that crude will likely be closer to 100 than 50. Considering that we are roughly trading crude at 75 right now, theoretically the odds should be about 50/50 on which way oil will go.

Originally posted by gaijindabe
How do these "speculators" drive the market? And how can I too? I would not mind making a few extra bucks..

Do you want to buy crude? If so I would suggest looking at the ETF ticker symbol:USO It is an oil etf that tracks the price of a barrel oil. I forget exactly which type of oil it tracks maybe Brent Sweet, but I am not posotive. Unlike trading futures you don't have to worry about taking delivery of a couple barrels of oil.

If you want to manipulate the market go get a billion dollars, more own't hurt, and start playing around. You might even hire an arab to drive a car bomb into a pipeline so you can spike the price of oil to get out of a couple contracts when you need some cash.

Rich

[turbo6bar]

Consumer confidence up today. Additionally, sales of vehicles with V8s is not falling. This equates to a public that is not perturbed by high fuel prices. We can absorb high oil prices as long as inflation does not creep into the rest of the economy, and I think Bernanke has the means to quell inflation (i.e. 50 or 100 basis points hike in Fed rates). Well, I hope that is true.

[Tervuren]

Aluminum is experiencing the exact same thing Wayne is describing. Our prices on Aluminum are being driven up by an artificial "lack of supply" created by speculators buying up the aluminum production.

[gaijindabe]

Speculation is a dangerous game left up to professionals. Ask the Hunt brothers. For every zillion you make, you can easily lose as much or more. If you have the skills and time and tools to track these things and profit from it - well it is a free world. Not like you can ban the free flow of investment and trade around the world.

A few years ago energy prices were rock bottom and going no place fast. Mobile was making more from retail operations than they were from drilling, refining and selling gasoline. If they are in the cat-bird seat right now, well what are you going to do?

It is a big and complicated world out there. No one set of energy producers, suppliers, traders or consumers can dominate it for long.

Best to keep you eyes open and trade in the SUV for a Corolla.

[Porsche-O-Phile]

If oil prices slump, producers will simply cut down supply to keep them up. The oil companies control the entire supply side of the equation (yes, they have their own suppliers, mostly in the ME, but looking at it from a consumer perspective. . .) Last I checked, they weren't public utilities either - fair game.

[pwd72s]

Our liberal "congress persons" from both Washington & Oregon are in the press, screaming about investigating big oil for collusion & corruption. The usual song & dance. I wish the press would ask them about why these same politicians block the building of refineries, why they block going for domestic oil, why they favor making fuel more difficult to produce and use.

[Moneyguy1]

Oligopoly

Phases of the moon pricing

fear

greed

And the beat goes on....

[SlowToady]

"The real reason gas and oil prices are so high..."

Cartels, collusion, Oligopoly. OPEC produces 40% of the world's oil and 60% of the oil traded internationally (Source: Microeconomics 16th edition).

"It is clear that the OPEC cartel has sufficent market power to hold the price of oil substantially above its marginal cost of production," (McConnell 231).

McConnell, Brue. Microeconomics 16th edition.

Bush just called for a Congressional investigation into whether or not oil companies in America are engaged in price gouging.

So we have OPEC artifically driving up the price of oil (or at least the power to) and then companies selling gas may be setting the prices even higher.

Oil supply is an Oglipistic market, although gasoline sales in America are not, with a Herfindahl Index of about 650 (Source: http://www.dallasfed.org/research/efr/2000/efr0003b.pdf). That makes the analysis a bit harder than relying on the assumptions of open markets, which we don't have.