weekend commentary - supply and demand
(snip)"Today, every time an Iranian mullah opens his mouth about nukes, the risk premium for Persian Gulf supply interruptions jumps again. Crude oil prices alone account for about $1.70 of what you pay for a gallon at the pump. So 10 years later, I'll wager again. Here's what the Bush search for price gougers and profiteers will find:
· Demand is up. China has come from nowhere to pass Japan as the number No. 2 oil consumer in the world. China and India -- between them home to eight times the U.S. population -- are industrializing and gobbling huge amounts of energy.
American demand is up because we've lived in a fool's paradise since the mid-1980s. Until then, beginning with the oil shocks in 1973, Americans had changed appliances and cars and habits and achieved astonishing energy conservation. Energy use per dollar of gross domestic product was cut by 30 percent in little over a decade. Oil prices collapsed to about $10 a barrel.
Then amnesia set in, mile-per-gallon ratings disappeared from TV ads and we became "a country of a million Walter Mittys driving 75 mph in their gas-guzzling Bushwhack-Safari sport-utility roadsters with a moose head on the hood, a country whose crude oil production has dropped 32 percent in the last 25 years but which will not drill for oil in the Arctic National Wildlife Refuge for fear of disturbing the mating habits of caribou."
I wrote that during the '96 witch hunt for price gougers. Nothing has changed. Except that since then, U.S. crude oil production has dropped an additional 12.3 percent. Which brings us to:
· Supply is down. Start with supply disruptions in Nigeria, decreased production in Iraq, and the continuing loss of 5 percent of our national refining capacity because of damage from hurricanes Katrina and Rita. Add to that the mischief of idiotic new regulations. Last year's energy bill mandates arbitrary increases in blended ethanol use that so exceed current ethanol production that it is causing gasoline shortages and therefore huge price spikes.
Why don't we import the missing ethanol? Brazil makes a ton of it, and very cheaply. Answer: the Iowa caucuses. Iowa grows corn and chooses presidents. So we have a ridiculously high 54-cent ethanol tariff and ethanol shortages.
Another regulation requires specific ("boutique") gasoline blends for different cities depending on their air quality. Nice idea. But it introduces debilitating rigidities into the gasoline supply system. If Los Angeles runs short, you cannot just move supply in from Denver. You get shortages and more price spikes.
And don't get me started on the missing supply of might-have-been American crude. Arctic and outer continental shelf oil that the politicians kill year after year would have provided us by now with a critical and totally secure supply cushion in times of tight markets."(snip)
Re: weekend commentary - supply and demand
immediately followed up by ...
(snip)"Increasingly, new energy sources that China is acquiring are in countries that Americans find distasteful. Many of them are in Africa, in countries with horrific human-rights records such as Sudan, Chad and the Republic of the Congo. And much of the energy is controlled by rapacious despots in the Central Asian republic of Kazakhstan and in Southeast Asia's Myanmar.
Energy acquisition is a zero-sum game in which there are winners and losers. Any new energy that China obtains for its fast-growing economy is unavailable to us forever. So you just have to wonder whether the United States' antipathy for dealing with the worst of the world's rogue states has led inexorably to $4-a-gallon gasoline this spring.
The new colonial power
Dan Zhou, chief analyst at CEB Monitor Group in Beijing, points out that China has emerged as an attractive partner in Africa and Central Asia in four ways: Its intensifying demand drives up prices for their products, which are largely raw materials such as oil, zinc and copper. It sets virtually no standards for political transparency or economic reform to get deals done. It ignores internal human-rights abuses as an impediment to deal-making. And it is a one-stop shop, offering not just investment, trade, skilled workers and military weapons, but also diplomatic protection in the form of its United Nations Security Council veto.
China's hunt for oil in Africa has made it essentially the new colonial superpower in the region, surpassing the memories of prior imperial forces like Belgium, Italy, the Netherlands, Great Britain and France. And it has achieved that status in record time. Trade between China and Africa, which totaled $10 billion in 2000, soared to $39.7 billion in 2005. According to research by CEB Monitor, here is a guidebook of China's assets in the region:
* Sudan. China has a $4 billion investment in the country widely believed to have the largest untapped oil reserves in Africa. The China National Petroleum Corp. has a 40% stake in Greater Nile Petroleum, which owns oil fields, a pipeline, a large refinery and a port. Last year, China purchased more than half of Sudan's oil exports. Conversely, Sudan accounted for 6% of China's oil imports, about 200,000-plus barrels a day.
* Angola. Offshore wells have made this Africa's second-largest oil producer. Through February of this year, Angola accounted for 13% of all oil imports to China -- making it the country's main supplier. China has committed at least $3 billion in loans to Angola for additional oil rights, and has supplied engineers and trained workers to develop fields. China is now Angola's largest aid donor as well.
* Nigeria. This is Africa's largest oil producer, and until recently has not been a major supplier to China. However, China's largest publicly held oil company, CNOOC (CEO, news, msgs), bought a 45% stake in a Nigerian oil-and-gas field for $2.27 billion last month and has also bought 35% of an exploration license in the Niger Delta for $60 million.
* Elsewhere in Africa. CNOOC has been active in Equatorial Guinea, Chad and Gabon; made investments of $170 million in the mines of Zambia; and become a major weapons supplier and trading partner of Zimbabwe, run with unbounded corruption by global outcast Robert Mugabe.
A less meddlesome buyer
In Latin America, the story is much the same: China is increasingly becoming the partner of choice for repressive, paranoid or regionally ambitious regimes that want to buy guns and tanks with their oil and ore revenues.
According to The Los Angeles Times, the Bush administration held talks with the Chinese to encourage them to curb their role in training and advising forces in our southern hemisphere. This is getting to be a problem, as the region -- fabulously rich in metal, energy and agricultural resources -- is increasingly run by ideologues willing to snub traditional U.S. interests and seek less meddlesome buyers.
China is now Latin America's second-largest trading partner, surpassing Europe. From 2001 to 2006, exports from the region to China rose more than 500%. In 2004 alone, Hu signed letters of intent worth $100 billion over the next 10 years, according to published reports. Here are the key developments by country, according to CEB Monitor:
* Brazil: The largest South American country exports iron ore, soybeans, cotton, oil and sugar to China and jointly develops satellites and aerospace equipment. China has promised $10 billion in additional investment in the short term.
* Argentina: China has signed agreements offering $20 billion in investment over 10 years. CNOOC is developing an offshore oil field.
* Venezuela: This is the third most important source of foreign oil to the United States, but political and social disputes have led strongman Hugo Chavez to seek alternative partners. He plans to double oil exports to China to 300,000 barrels a day, about a fifth of the 1.5 million barrels a day that are sent to the United States. The Chinese are buying stakes in several oil fields, making their output unavailable to U.S. consumers.
* Ecuador: This country is a top-three producer of oil for the West Coast of the United States. The Chinese just purchased one oil field and are in negotiations for more."(snip)
The major point here is that not only is China bidding up the current market price of 'free market oil' versus the US, Europe, Japan, India etc. thus increasing today's price of crude oil for everyone - which of course they are - but ...
China is also 'climbing into bed' with various leaders of many oil producing countries - countries that US and 'western' private institutions are dissuaded from dealing with because of their horrible human rights / totalitarian / war records - such that by the Chinese investing heavily in these countries while the 'west' will not, China is sewing up exclusive future oil supply contracts. This move essentially makes future oil production from these countries (or at least from the oil fields now owned or under contract to China) unavailable on the 'free market' since that oil has essentially become the exclusive property of China.
Given that oil production in more 'acceptable' areas of the world (like Saudi, North Sea, Canada) is peaking out or declining, China's buying their way into 'new sources' of oil production will leave future US and European oil buyers paying ever higher prices for the ever shrinking supply of remaining 'free market' oil. The 'tipping point' is possibly not all that far away when, as more and more oil is removed from the 'free market' via the Chinese purchase of South American/African oil field assets for their own exclusive use, the amount of remaining 'free market' oil available at any price is simply insufficient to meet the import needs of the US and Europe. This could lead to massive economic and social disruptions.
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Re: weekend commentary - supply and demand
Quote:
Originally Posted by Melonie
http://www.washingtonpost.com/wp-dyn...042701693.html
· Demand is up. China has come from nowhere to pass Japan as the number No. 2 oil consumer in the world. China and India -- between them home to eight times the U.S. population -- are industrializing and gobbling huge amounts of energy.
Then amnesia set in, mile-per-gallon ratings disappeared from TV ads and we became
"a country of a million Walter Mittys driving 75 mph in their gas-guzzling Bushwhack-Safari sport-utility roadsters with a moose head on the hood, a country whose crude oil production has dropped 32 percent in the last 25 years but which will not drill for oil in the Arctic National Wildlife Refuge for fear of disturbing the mating habits of caribou."
God, that's funny. I can't get that vision out of my head. I just don't understand why people want to waste their money on gas and to hell with the environment. There'll be no beach left by the time Chinese, Indians, Africans, South Americans get to driving as much as we do!
Quote:
Originally Posted by Melonie
I wrote that during the '96 witch hunt for price gougers. Nothing has changed. Except that since then, U.S. crude oil production has dropped an additional 12.3 percent.
There's no gouging so much as a lack of price controls. I don't see Congress starting 'em so we consumers have to protect our wallets by choosing efficient rides and taking mass transit when we can. The beachfront's getting chewed and the midwest is getting ripped up by CRAZY storms. It's time to react!
Re: weekend commentary - supply and demand
Quote:
There's no gouging so much as a lack of price controls. I don't see Congress starting 'em so we consumers have to protect our wallets by choosing efficient rides and taking mass transit when we can. The beachfront's getting chewed and the midwest is getting ripped up by CRAZY storms. It's time to react!
With the US only producing something like 32% of America's total oil consumption, with the balance being imported from the Middle East, South America and Africa, let me ask a stupid question. How on earth can the US congress attempt to enact price controls on oil when doing so would cause 68% of America's total oil / gasoline supply to be immediately redirected to other countries / customers willing to pay the 'world market price' ? While regulating the maximum price of the remaining 32% might be legally possible, it's going to be rather difficult for the US gov't to start issuing rationing coupons allowing every American 9 gallons of gasoline per week and enough heating oil to make it as far as New Years day !
Even if the US gov't were willing to take the lumps from the environmental lobby ... were willing to sweep aside all restrictions to drilling for known US gas and oil deposits i.e. the ANWR, offshore on all three coasts, etc. ... it would still take YEARS to drill the wells, build the pipelines, and bring this additional American oil to refineries. Even so, it is doubtful that there is enough potential new production capacity to keep up with the growing American demand for oil.
Wishful thinking is not going to change the fact that the US gov't is basically powerless to affect the price and availability of heating oil and gasoline ... other than possibly reducing the 64 cents per gallon state road tax (in my state) and 18 cents per gallon federal road tax they are currently collecting ! There were lots of news stories this week about Exxon's $8.4 billion dollar first quarter profit. However, there were no news stories to speak of telling the American public that state and federal road taxes collected $17+ billion dollars on gasoline sold by Exxon in the first quarter !
Re: weekend commentary - supply and demand
Quote:
Originally Posted by Melonie
With the US only producing something like 32% of America's total oil consumption, with the balance being imported from the Middle East, South America and Africa, let me ask a stupid question. How on earth can the US congress attempt to enact price controls on oil when doing so would cause 68% of America's total oil / gasoline supply to be immediately redirected to other countries / customers willing to pay the 'world market price' ?
The oil companies in this country were asked what could be done and that was their answer, that there are no regulations affecting what price they charge so they see no reason to cut prices.
They can sell to whomever they want at whatever price they want. If they cut their prices they certainly don't have to sell it all to other countries. Much like pharmaceuticals that change their prices at will, nothing stops American oil companies from changing their prices at will.
And I still say girls and guys, you'd be wise to buy the most efficient vehicle possible to protect your wallet. Make your home as efficient as you can and replace your old inefficient appliances with more efficient ones.;)
Re: weekend commentary - supply and demand
I'm certainly not going to argue with your very good advice about quickly migrating to cars that get better gas mileage, insulating your home, and investing in newer more efficient appliances. The prices of all forms of energy are likely to continue rising.
However, in regard to American oil companies, in essence there is no such thing anymore. Probably 40% of the stock of any American company is actually owned by foreigners, and probably another 40% by funds, who expect a reasonable return on their investment. Thus if the US gov't was to institute fixed reduced price caps on oil - gasoline sold in America, even if 'average Americans' were to agree with the reduced priced caps, 80% of the oil company stockholders will not agree to sacrifice profits/dividends on their investment. Thus even if an oil company president were to decide to continue selling oil - gasoline in America at reduced prices instead of diverting that oil - gasoline to other countries to be sold at 'world market' prices out of the goodness of his heart, he wouldn't remain president of the oil company for long !!! Similarly, if the US gov't were to attempt to tax the snot out of American oil companies in order to 'rebate' the money to poor Americans, those same stockholders would vote to move corporate headquarters to a Caribbean island in a heartbeat to escape the new corporate tax (reference Benedict Arnold corporations). Of course, the Chinese stand ready to buy up the stock of any dis-satisfied oil company stockholders (i.e. the failed UnoCal bid), and if successful they would attempt to ship oil from American wells to China at 'world market' prices!
Real world facts here are that, at best, the US gov't might be able to control the ultimate selling price of American oil - gasoline which was pumped from wells on US soil. As mentioned before, this amount of oil would only meet about 1/3 of existing American demand. Thus any gov't attempts to reduce gasoline prices at the American pump (other than by reducing the 64 cent + 18 cent per gallon road tax) is going to create immediate and very large shortages of supply. In fact, if all of that American well oil were allocated to the production of diesel fuel, it might be just sufficient to keep diesel semi trucks on the road bringing raw materials to processors and bringing products to suburban stores, to keep diesel tractors plowing fields to keep producing food etc. Of course, this would leave every American riding a bicycle to work and burning a wood stove to heat their home next winter.
Even if the 'impossible dream' of convincing oil companies to cut profits in order to lower the price of gas at American pumps were somehow possible, what to you expect to get ? Exxon's quarterly profit of $8.4 billion dollars in actuality represents just 9 cents per gallon of gasoline sold. So yea, America confiscates and refunds the entire gasoline profits of Exxon and the price of their gasoline at American pumps goes down by 9 whole cents ! This is an entirely different situation than your example of pharmaceutical companies, where there is a 30-40-50% corporate profit margin embedded in the product which can be lowered at the discretion of management and still result in a very acceptable profit margin, versus the 3% corporate profit margin ($.09/$3.00) in every gallon of Exxon gasoline.
The REAL profit-takers are actually the Saudis, the Kuwaitis, the Iranians, the Argentinians, the Canadians, the Mexicans etc. who are pumping oil out of their contrries ground at a cost of (typically) less than $20 per barrel, and reselling it on the world market for $70 per barrel. I suppose that the US gov't could go back to using Teddy Roosevelt measures to get some of these countries to agree to lower their price of crude oil sold to America ! However, I suspect you're not a big supporter of such former 'business pursuasion' measures - nor does the US have anywhere near enough troops in uniform to attempt to pull off such a 'business pursuasion' measure today. Coincidentally, this probably explains why the US military is being concentrated in the midst of the world's largest oil fields, most of which lie within a few hundred miles of Iraq !
However, when enough Americans wind up broke, unemployed, hot/cold, hungry, and stealing from / assaulting / killing each other due to the fallout of rising US$ denominated energy prices ...
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Re: weekend commentary - supply and demand
^^^ This is called "substantial structural problems in the US economy."
Re: weekend commentary - supply and demand
^^^ the 'tin foil hat' crowd would call it time to invest in oil company stock, time to convert your US dollars to Euros or gold, time to plant your own garden, time to cut your own firewood, time to buy guns and generators, and time to perform some concrete and steel oriented home improvements ...
Re: weekend commentary - supply and demand
I've been dying to know--what is this Tin Foil Hat crowd? Are they like the lunatic fringe of economic prognostication? Or are they survivalist types?
Re: weekend commentary - supply and demand
Hey, let's have some optimism! Shareholders won't necessarily bolt if oil companies ease up on prices. They've made record profits! It's not like these companies are on the brink of bankruptcy. They had their fun, now they should be good corporate citizens and get off our necks before we start demonstrating outside Congress and the state houses for regulations. OOOO, big, bad regulations. They don't like that. Or we can press for faster development of alternative fuel technologies. OOO, they won't like that either.
I mean why bother with the PR blitz telling us how they protect the barrier reefs with their platforms (supposedly encouraging the growth of the natural habitat blah, blah, blah). Show us some Real Love at the pump! Back off, pirates! If the worlds leading car companies and engineers are given the funding to ramp up production of these alternative cars we can sock them in the gut in a year!!! Unless they play nice....
Re: weekend commentary - supply and demand
It's fun to watch politicians scramble, like ants on a burning log, to address public ire over gas prices. They want to be seen doing something, but, being politicians, they can't quite tackle the actual problem. Thus one Republican proposal is to resurrect the recently killed effort to drill for oil in Alaska's Arctic National Wildlife Refuge -- thanks guys, that'll help -- and another is to send everybody a check for $100.
http://www.chicagoredstreak.com/outp...s-stein28.html
Oil Company Subisdies: $7 billion + 2.6 billion + ...
Vague Law and Hard Lobbying Add Up to Billions for Big Oil
By Edmund L. Andrews, NY Times, March 27, 2006
But last month, the Bush administration confirmed that it expected the government to waive about $7 billion in royalties over the next five years, even though the industry incentive was expressly conceived of for times when energy prices were low. And that number could quadruple to more than $28 billion if a lawsuit filed last week challenging one of the program's remaining restrictions proves successful.
''The big lie about this whole program is that it doesn't cost anything,'' said Representative Edward J. Markey, a Massachusetts Democrat who tried to block its expansion last July. ''Taxpayers are being asked to provide huge subsidies to oil companies to produce oil -- it's like subsidizing a fish to swim.''
But on Aug. 8, Mr. Bush signed a sweeping energy bill that contained $2.6 billion in new tax breaks for oil and gas drillers and a modest expansion of the 10-year-old ''royalty relief'' program.
http://zfacts.com/p/348.html
There is alot of smoke and mirrors going on concerning oil and gas prices I believe. No one is really going to do anything about it. But with President Bush screaming about the prices which I think is his way of telling his oil friends knock it off or we are all gonna be fucked gas prices here anyway have dropped ten cents.
http://www.msnbc.msn.com/id/12400801/
All of a sudden there is now talk of gas prices cooling off. It makes no sense.
Researching this I found something of a bigger concern.
http://moneycentral.msn.com/content/P149330.asp
China is finding oil with the most unsavory of countries. Countries known to aid terrorism aka Sudan. The enemy of my enemy is my friend.
A friend of mine that came back from Kosovo and is studying to be a scholar of war told me something interesting that i didnt understand then but I do now.
He told me war was not really fought with guns but with economics. Nothing is ever what it seems. I couldnt get him to elaborate. But it is becoming more clear now.
America is in a very vulnerable place with no real leadership.
Re: weekend commentary - supply and demand
Quote:
Originally Posted by Optimist
Hey, let's have some optimism! Shareholders won't necessarily bolt if oil companies ease up on prices. They've made record profits! It's not like these companies are on the brink of bankruptcy. They had their fun, now they should be good corporate citizens and get off our necks before we start demonstrating outside Congress and the state houses for regulations. OOOO, big, bad regulations. They don't like that. Or we can press for faster development of alternative fuel technologies. OOO, they won't like that either.
I mean why bother with the PR blitz telling us how they protect the barrier reefs with their platforms (supposedly encouraging the growth of the natural habitat blah, blah, blah). Show us some Real Love at the pump! Back off, pirates! If the worlds leading car companies and engineers are given the funding to ramp up production of these alternative cars we can sock them in the gut in a year!!! Unless they play nice....
I always thought that if oil was really in short supply and soon to run out wouldn't people be getting out of the oil buisness like rats off a sinking ship?
Even with a huge demand and little supply only a few would make big profits if it was as bad as they say.
As far as funding it is really all talk i believe. They talked the same talk in the seventies and nothing happened. It is just up to us to make the right choices.
Re: weekend commentary - supply and demand
Quote:
I've been dying to know--what is this Tin Foil Hat crowd? Are they like the lunatic fringe of economic prognostication? Or are they survivalist types?
since you asked, here's a 'tin foil hat' economic assessment of the American and world oil situation
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I always thought that if oil was really in short supply and soon to run out wouldn't people be getting out of the oil buisness like rats off a sinking ship?
It's more analogous to a situation where the south american supply of coca paste is being systematically reduced via gov't intervention destroying coca grower's yields (yeah right, but this is a what-if scenario). Thus if drug 'refiners' in Bogota have a reduced supply of coca paste available to refine into Cocaine, they'll simply raise the price for whatever Cocaine they wind up being able to put on the 'market'.
Thus when drug dealers in Miami or NY or LA are no longer able to get their hands on enough Cocaine supply to satisfy the demands of their customers, and must pay a much higher price to the 'refiners' for whatever reduced quantity they are still able to buy, they'll simply jack the price sky high when they resell it to their 'retail' addict customers ...
thus generating just as much if not more income for themselves by prehaps tripling their price on half as much supply, with the 'rich' half of their customer base still being able to afford their 'fix' and with the poor half of their customer base being left high and dry ... who will in turn resort to stealing / assaulting / killing their neighbors in order to obtain their own 'fix' that they need to keep living their lives as they've become accustomed, but which they can no longer afford due to the stiff price increases for Cocaine and no corresponding increase in their own wages/earnings.
!
Re: weekend commentary - supply and demand
Yes but if you were in the oil biz and your oil field is going dry as they say. It wouldnt matter how much you could charge for the last drop. You would still be out of business is my point.
Re: weekend commentary - supply and demand
Quote:
Yes but if you were in the oil biz and your oil field is going dry as they say. It wouldnt matter how much you could charge for the last drop. You would still be out of business is my point.
Yes, but in reality we're nowhere near that point in any major world class oil field, and probably won't be for at least another 20 years. For example, the largest Saudi field is estimated to still have 50% of its original oil remaining ... after something like 60 years of steady production. What IS different is that when an oil field is first discovered the oil is under high pressure (remember the 50's movies showing Texas 'gushers' ?), meaning that early oil practically pumps itself into the barrels and all an oil company has to do is collect it and ship it. However, as these fields get older, the natural pressure disappears, the remaining oil has to be pumped from deeper and deeper depths, thus the price per barrel that an oil company must invest to bring every additional barrel to market is higher than the barrel before it.
Rough guesstimates now have it that the actual cost of producing a barrel oil from Saudi fields is something like $20. The actual cost of producing a barrel of oil from a Venezuelan field is something like $30. The actual cost of producing a barrel of oil from a Texas field or the North Sea (which is becoming depleted plus high cost due to offshore operations) is something like $40. And the actual cost of producing a barrel of oil from tar sands/ oil shale (needs huge energy input to make steam to separate the oil) is something closer to $50.
In reality, the world isn't close to running out of oil. What it is running out of is cheap to produce oil. And because of the law of supply and demand, basically the cost plus profit margin of the last barrel of oil coming onto the market in order to satisfy the last bit of demand sets the price for all other oil produced, regardless of the actual production cost of any of that other oil. Electricity - natural gas - commodity markets of any sort basically work the same way. Where oil is concerned, this means that every new barrel of demand that China and India bring to the market raises the price of every barrel of oil for everybody, and every existing barrel of oil kept off the market by terrorist bombings of pipelines etc. also raises the price of every barrel of oil for everybody.
In reality, right now the oil shale / tar sands producers are barely making a profit at $65 per barrel prices (after taxes, paying investors etc.) It is the Saudis, Venezuelans, Africans and other low cost producers who are really raking in the PetroDollars right now.
If a coming recession were to cut back on the world's demand for oil, if the islamic terrorists and African despots could be kept from blowing up oil rigs and pipelines and oil industry employees, i.e. if there were even a 5% swing between demand for oil and current production, such that oil from tar sands/ oil shale was no longer needed to meet the last bit of demand, the price of ALL oil sold would probably drop by $10 a barrel. The same price reduction would be likely to happen if even a relatively small amount of additional low cost new oil supply could be brought to the market, i.e. the ANWR or offshore drilling off any of the three US coasts.
But you are correct that eventually the oil industry will simply 'dry up' and cease to exist as we know it. This is exactly the reason that oil companies/stockholders are granted a depletion allowance (i.e. the subsidies you're talking about), while software or media companies/stockholders are not (because they'll never run out of new programs LOL).
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