Oil

[Shaun @ Tru6]

two threads in one:

1. How much "new oil" is found worldwide, annually, and how many total new wells are drilled, both for new fields and existing. How many oil fields are found and not utilized each year, due to any reason: economic viability, war, politics, etc.

2. If I were to buy oil futures, is there anything prohibiting me from trying to effect the price of oil? Could I do it anonymously? Is there an agency, U.S. or other international group, that I would need to worry about?

[techweenie]

It isn't the oil itself. It's the companies that control it. It still costs about $30 a barrel to get it, but we're paying $110 a barrel because the people who control it can get that much from us. Cost of production will rise a bit when we figure out how to recover difficult-to-reach oil, like that huge field off Brazil that was discovered a couple years back.

[sammyg2]

the answers to your first questions can be found here with a little persistence:

EIA - Petroleum Data, Reports, Analysis, Surveys
EIA - Petroleum & Other Liquids Data

As far regulating the speculators, not much, not much.
The DOJ "might" get involved but you'd have to be pretty big fish (and white).
Most of it is regulated the same as any other commodity that's traded on the NYME or such.

Now ponder this for a second:
suppose you were running a powerful country in the middle east that has a whole bunch of oil.
You're a major player in OPEC and don't really want to piss off the other members too much, and you really don't want to get caught manipulating the price of oil more than OPEC agrees to, but you secretly you want to stick it to the US.

So you produce and offer to sell your full quota of oil.
EXCEPT ......... an agent in europe who is secretly employed by you uses your money to buy your product and effectively take it off the market.
All you are doing is withholding oil to drive the price up but it doesn't look like that and the US gubmint doesn't catch on right away. They kinda know but they don't say anything because you're driving up the price also increases their revenue from the oil. You make more money, they make more money, only the US the people get screwed.

On paper is looks like there is a large surplus of available oil but in reality those numbers have been doctored. The supply isn't as big as it seems and the market acts in a way that would indicate a smaller supply than the numbers say. Sound familiar so far?

Then after a few months when the price has jumped a whole bunch, you dump the oil at a much higher profit.
Then because you are so smart and have so much power, you short the market right before you sell off your inventory, and make a killing as you drive the price down. But it looks like someone else is doing it and you laugh all the way to the bank with your $ trillions and no one says squat.

[sammyg2]

Originally Posted by techweenie

It isn't the oil itself. It's the companies that control it. It still costs about $30 a barrel to get it, but we're paying $110 a barrel because the people who control it can get that much from us. Cost of production will rise a bit when we figure out how to recover difficult-to-reach oil, like that huge field off Brazil that was discovered a couple years back.

If you had something that cost you $30 and you put it up for auction on e-bay and someone bid it up to $110, would you refuse to take that much money or would you laugh all the way to the bank? Yeah that's what I thought.


The oil companies do not control the price of crude or the price of fuel.

Let me say that again:

The oil companies do not control the price of crude or the price of fuel.

If they did the price would be closer to $8 a gallon and STABLE.

Certain oil-producing countries play games but the oil companies cannot.

[techweenie]

You're such a hoot, Sammy. You suggest that the oil companies and the producer countries are not wholly in collusion? LOL

[sammyg2]

Originally Posted by techweenie

You're such a hoot, Sammy. You suggest that the oil companies and the producer countries are not wholly in collusion? LOL

Yes, that is exactly what I am suggesting based on thirty years of experience and research.
Sometimes a company has to play along with a foreign country in order to keep their leases and contracts (ven u-sue-ayla comes to mind, but the companies there ended up losing bigtime).

The companies don't like it and don't want any part of it, they don't want to be forced to play the stooopid game, but it's the price to pay to do business in certyain part of the world. It is not for their benefit and the oil industry is the MOST CLOSELY SCRUTINIZED AND REGULATED industry in the world except for maybe booze and nukes.

Now it's your turn to present your counter-point, please explain how you came to that assumption and what evidence you have to support it.
You intimate knowledge of the industry's inner workings will help you a great deal in that effort.
Surely you didn't just pull it out of your ass, did you?
Nawww, say it isn't so ......................

[Shaun @ Tru6]

Originally Posted by techweenie

You're such a hoot, Sammy. LOL

Originally Posted by sammyg2

Surely you didn't just pull it out of your ass, did you?
Nawww, say it isn't so ......................

Here's something: let's keep the personal jabs out of the discussion.

[techweenie]

I know you don't read much, Sammy, but this might help you understand.



The majority of the world's oil reserves are controlled by state-owned companies. The rest is "in play" politically.

The US doesn't "own" energy companies. It's really closer to the other way around. Many energy companies are paying infinitesimal taxes and getting direct government subsidies. All while making record margins and profits. How they work with the US government is rarely illuminated as clearly as the evidence below shows...

[Tobra]

Originally Posted by Shaun 84 Targa

Here's something: let's keep the personal jabs out of the discussion.

First time for everything, right

I think you might try to affect the price, and you are too small a fish to have much of an effect

[jluetjen]

Originally Posted by Shaun 84 Targa

two threads in one:

1. How much "new oil" is found worldwide, annually, and how many total new wells are drilled, both for new fields and existing. How many oil fields are found and not utilized each year, due to any reason: economic viability, war, politics, etc.

2. If I were to buy oil futures, is there anything prohibiting me from trying to effect the price of oil? Could I do it anonymously? Is there an agency, U.S. or other international group, that I would need to worry about?

Shaun;
I'll address the 2nd point from a fairly straight forward perspective. Anyone can buy oil futures contracts. Call your broker and tell them how much of what contract you want to buy and you're in. Anyone can also step into ring with Manny Pacquiao too. The results may be about the same in both cases.

I'm not suggesting that you can't make a killing in Commodities in general, or Oil Futures specifically, but consider the following as a sort of disclaimer...

1) A large portion of the entities trading oil futures have stake in the game -- namely either oil in the ground, or business that significantly use oil in their products. Both of these groups are very educated traders with access to all sorts of information that you won't have. So you'll essentially be taking a knife into a 21st century battlefield.

2) The third group of players are the speculators who don't have a stake in the commodity. Many of these are also professionals. Among these are folks practicing arbitrage where they are comparing oil-futures versus other things (like funds of stocks that tend to move opposite oil) or the markets in Europe and Asia, and make huge movements based on tiny changes in the value. They are backed up by teams of professionals, many with heavy weight math degrees and large computers to identify the slight gap in the movements between the things that they are offsetting which allows them to make their profits.

3) The 3rd group are small time guys who figure that they can outsmart groups 1 and 2. I'm not saying that it can't be done, but for how long, by how many people? You'll always hear about the guy who makes a killing by doing this, but you'll never hear about the rest of the distribution. You'll be joining this last group (small time players) if you enter the market.

Will you be able to influence the price of oil? Absolutely. Will you be able to measure the results (compared to all of the other players)? No. It took a lot of effort for the Hunts to corner the silver market a few decades back, and it ultimately ruined them financially. Sure they cornered the market -- but they didn't stop to think of what their exist strategy was going to be.

So that's my $0.02 after getting my MBA. I'm no expert but I still remember one example from my Investments professor.

"The Chicago School of Economics is best described by this example -- If you saw a $100 bill on the floor of a busy hallway -- should you pick it up? The Chicago School's answer is "No", because if it really was a $100, it wouldn't have been left on the floor for you to find". Note that the commodities exchange is located in Chicago...

So are you feeling lucky???

[jwasbury]

If I read this chart correctly, it says that the inflation adjusted price of gas is at similar levels to 1979-1980...i.e. we've been here before.

Taking a look at Exxon Mobil's latest 10k, their pre-tax margin is 13.8% which is a nice return, but certainly not the highest out there.

Take Apple, for example, with a pre-tax margin of 28.4% yet I don't see anyone complaining about the price of Ipads or Iphones.

Originally Posted by techweenie

Many energy companies are paying infinitesimal taxes and getting direct government subsidies. All while making record margins and profits. How they work with the US government is rarely illuminated as clearly as the evidence below shows...

[techweenie]

Jacob, I believe it would be problematical if Apple products were a strategic necessity to the US. They are not. Petroleum products are so tied to the national interest that we need to pay attention to how the market operates.
Yes, inflation adjusted, gas prices are in the range of the "gas crisis" of '79-83. It's the recent trend lines that have a lot of folks nervous.

My concern over energy companies profit and compensation is not unique:

Exxon Mobil profit nearly doubles - Jul. 29, 2010
Oil Company Profits Surge | Economy and Business | English
Exxon Mobil facing investor criticism on pay | Reuters

[Shaun @ Tru6]

Thanks for all the good replies. I was supposed to have some free time yesterday and today, but some mfg. issues have come up, as they always do. Never go into mfg. Services. that's the easy money.

carry on.

[jluetjen]

Shaun;
Another thing to consider is the nature of the investment. When you buy stocks, if the value of the stock goes down, you risk losing some of your principle. In the worst case, the value of the stock may go to $0 and you will lose your entire investment. You walk away with no money and an education.

When you buy oil contracts, you are buying a future option. These are generally highly leveraged. If you buy a contract on the assumption that the price of oil goes up (Say buy a $150 contract when the current price is $100), and in fact the price makes a big jump in the other direction, you will find yourself with an obligation to take possession of oil at $150/barrel, when the current trading price is possibly only $75 a barrel, and you paid money for the contract that put yourself into this situation. Unless you have holding facilities for the oil, you are going to be stuck having to sell your contract at a huge discount and make up the difference from your own assets. So commodity trading can wipe you out, even if you only invested a small amount up front.

Another key point is that contracts are not like stocks in regards to their life. If you own stock in a company and the value takes a dip -- you have a choice. You can either sell it off and take your loss, or hold the shares in the hope that the stock will bounce back. Futures contracts on the other hand have a life. If you bought a 30 day contract, at the end of the 30 days you need to take action unless you want a delivery of oil to your house. So this will either force you to roll the contract over (thus incurring transaction fees) or else lock in the loss. So commodities are not an investment for the "buy and hold" type of investor.

So to sum up -- for the small investor the risks are huge. For large investors on the other hand commodity contracts are a means to hedge risk resulting from their other investments. But they need sophisticated management in order be successful over the long run.

(PS: If there are any commodities traders among us who disagree with my overview -- please chime in. I've only got passing knowledge of the subject and would appreciate the input.)

[Porsche-O-Phile]

"We're just filling a need!"

Okay for oil distributors, not okay for drug distributors.

Just want to be sure I've got that right.

[jluetjen]

Originally Posted by Shaun 84 Targa

Never go into mfg. Services. that's the easy money.

Hey!!! That's what I do (although in a different industry). The grass may look greener on the other side of the fence, but being in the manufacturing services is no walk in the park. Try dealing with disorganized customers, customers with non-manufacturable products, not to mention rising raw material prices while providing what is economically speaking a commodity service and margins in the single digits, and then getting squeezed or dropped with no warning for the sake of a one or two percent in price -- by customers who generally are making 10%-50% in margin. All of this is going on while you're trying to get pay-back on significant capital investments.

To be honest, the manufacturing services industries is kind of like running an airline. You buy a whole bunch of airliners for 10's of millions of dollars, and then you try to get enough people to buy seats at the going market rate to pay off the investment in planes. It's not an industry for the feign of heart, but that's true of most non-government jobs.

[EarlyPorsche]

Just a hypothetical question: does the fact that oil is almost as vital as many other daily use items make the price gouging easier for the [whoever you think or want to think is behind oil prices].

[techweenie]

Originally Posted by EarlyPorsche

Just a hypothetical question: does the fact that oil is almost as vital as many other daily use items make the price gouging easier for the [whoever you think or want to think is behind oil prices].

IMO, yes. But that leads to another question: as a strategic resource, is it the responsibility of government to assure its availability? And if it is a governmental responsibility, does that mean war over resources is justifiable? My opinion: yes to both.

[Shaun @ Tru6]

Originally Posted by jluetjen

Hey!!! That's what I do (although in a different industry). The grass may look greener on the other side of the fence, but being in the manufacturing services is no walk in the park. Try dealing with disorganized customers, customers with non-manufacturable products, not to mention rising raw material prices while providing what is economically speaking a commodity service and margins in the single digits, and then getting squeezed or dropped with no warning for the sake of a one or two percent in price -- by customers who generally are making 10%-50% in margin. All of this is going on while you're trying to get pay-back on significant capital investments.

To be honest, the manufacturing services industries is kind of like running an airline. You buy a whole bunch of airliners for 10's of millions of dollars, and then you try to get enough people to buy seats at the going market rate to pay off the investment in planes. It's not an industry for the feign of heart, but that's true of most non-government jobs.

quick OT while I gobble down lunch and read resumes. I mean services like consulting, John. Made stupid money doing essentially marketing consulting, easiest money ever made, most money I've ever made. LT is awesome and we're expanding faster than I can keep up, but garment mfg. is the hardest thing I've ever done. The pay off is there, just so many headaches along the way. Consulting, no headaches, at least what I was doing. back to work!

[Rich76_911s]

Originally Posted by EarlyPorsche

Just a hypothetical question: does the fact that oil is almost as vital as many other daily use items make the price gouging easier for the [whoever you think or want to think is behind oil prices].

Oil is a short term inelastic product. Which means prices can rise and we'll still buy roughly the same amount of it. In theory oil and gas producers could all collude together and raise prices and we'd still buy the stuff. Over the longer term we can adjust to the higher prices by driving more efficient cars, switching to alternative energy sources, etc. But in the short term most of us are stuck. Which also means that raising taxes on oil companies, just means they will pass added costs down to the consumer.

I for one, do not think gouging or cornering (as Shaun alludes to in post #1), the oil market is very likely. It is too large, with too many self interested parties. It is illegal to corner a market or to artificially manipulate prices. This would be regulated by the commodity futures trading commission and probably the SEC. How hard either of those two try to regulate their markets is debatable. One problem is the burden of proof is on the regulators, and neither cornering nor gouging is easy to proove. It would be darn near impossible to get a large enough position to corner the oil market without others knowing about it. If they new about it they would try to squeeze you out of it. Sqeezing is also illegal, and hard to proove.

Please note that this does not mean that oil cannot trade above fair value, which it may or may not be doing right now. Markets can act irrationally for a long time, and the oil market is not one that can avoid that fate. But just because oil is above a "fair value" does not mean there is collusion, gouging, and cornering of the market.

I could be wrong, but I think most people would not be able to trade futures. Futures require significant margin positions and settle to cash every night which means most brokerages will not touch them. It becomes a large accounting problem. The easiest way for most to access commodities is through Exchange Traded Funds (ETF), but be cautious with them, quite a few do not track the underlying asset as well as they should. The USO (oil ETF) being a very good example of one that does not track oil very well.