Significant Reduction in Petroleum / Gasoline Prices, HOW?

[2cents]

look i don't think they are lying, but at those price levels as a real buyer i wouldn't mind waiting to see if the prices come down if i can afford to wait...

other thing is, the price discovery mechanism is clearly flawed in more than one way - and thanks for your excellent posts and urls earlier in the thread btw - but as you pointed out yourself, everybody relies on the assumption that the end user has no choice. to me that's the real problem honestly... and it's up to the end user (consumer, municipalities etc) to prove the assumption wrong, in deeds, not words...

therefore methinks it's a great opportunity for both nuclear & alternative energies actually... too bad for joe bloke who can't be arsed to think about how to drastically diminish his dependence on oil honestly... why should we care if he is happy to pay through the nose...

having said that i do think the $10-15 war premium has got to go...

 

[limitdown]

The open discussion on this matter has caused a number of artificial bubbles to burst because they just can't hold weight, and were floated on the CNBC and other financial channels as supposedly insider thoughts....

In reality, those viewpoints were being offered by those closely involved with the Oil Administration (not necessarily the same as the Bush Administration)....


We discussed earlier in this entire thread that these prices would lead to collapse, and we continue to have this, especially today, Monday, June 19th.

For example, the Dow futures after the market opened, went from 11130 to 10985 within the same trading day, and the day is not over.

Collapses like that are not because of the prior weekend's option expiration process. They are a result of reality not economic spin (read political spin) on true conditions within the US.

It is deplorable that the other commentator was able to quote from another source that the Saudi Oil Administration could not find buyers.

This flies into the face of reason, with similar comments being mentioned earlier that China, India and other countries coming online were the cause of these price spikes, and no way to reason that in reality. So, should we call these events confirmation?

 

[limitdown]

Over 32 Senators, Govenors and Representatives are supporting this effort to push with urgency seperation from dependency upon Oil based fuel sources.

www.25x25.org was reported on by Farms Report.

the shift has started in earnest,

which means the price at the pump will be collapsing and no longer signficantly controlled by foreign oil sources

 

[loufah]

It was interesting to read yesterday (on briefing.com, citing Reuters) that the US crude stockpiles are at their highest level since 1998. Yet crude and gasoline (looking at the August contracts) are each up 10% this year.

As a libertarian coworker puts it:
- if you charge $2.00/gallon, you sell all of your supply
- if you charge $3.00/gallon, you sell all of your supply
- if you charge $4.00/gallon, you sell almost all your supply
which price would you choose?

 

[loufah]

Quote from limitdown:

It is no coincidence that where the refineries are, the cost of gasoline is as low as possible.

I'm not sure about that. There are refineries in southeastern Pennsylvania, yet gasoline is still high. My father lives within 5 miles of 4 refineries, yet after Katrina hit, gasoline popped just like it did everywhere in the country, even though he was buying, as he described it, gas that had been refined and "in the ground" (in storage) for weeks.

 

[mtzianos]

Actually, combined (commercial plus government) inventories in US are at the highest level in history, over 1 BILLION barrels.

The problem seems to be the broken system for determining prices, which prevents arbitrage between spot and futures and has allowed big investors (investment banks etc) to corner the market.

It results in prices going up and at the same time producers insist that they can't find buyers for all their oil (incl. light crude) and have to cut production (see previous comments and info in http://dhatz.blogspot.com/2006/06/oil-to-38657-per-barrel.html).

The quickest way to fix it would be to go back to country-to-country contracts for oil (or just imply doing that).

 

[slopyjalopi]

How is it price gouging if people willing pay for the gas and company's willingly sell? I thought voluntary trades are a good thing since both people are getting what they want.

 

[mtzianos]

Basically, everyone knows the oil price is due to "investor" demand.

As long as -due to small spare production capacity for THOSE PARTICULAR CRUDE OIL TYPES- investors control the "marginal barrels" of the oil type used for physical delivery in futures (light sweet crude), they can set price to just about anywhere.

The question is whether something ought to be done about this bleeding of ~$500-$600bn/year from western nations into the hands of oil producers (at current prices it's going to be even more).

Bhushan Bahree and Ann Davis wrote in WSJ in Apr-06 (http://users2.wsj.com/lmda/do/check...ine.wsj.com/article/SB114532452352528310.html):

Crude oil closed above $70 a barrel for the first time, highlighting a phenomenon reshaping the petroleum world: investment flows into oil futures are supplanting nitty-gritty supply-and-demand data as prime drivers of prices

In contrast to past bull markets in crude, this year's run-up has occurred even though oil inventories in the U.S., the world's largest market, have swelled to their highest levels in nearly eight years....

The answer to the puzzle posed by rising prices and inventories, industry analysts say, lies not only in supply constraints such as the war in Iraq and civil unrest in Nigeria and the broad upswing in demand caused by the industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush of investor funds into oil markets. Institutional money managers are holding between $100 billion and $120 billion in commodities investments, at least double the amount three years ago and up from $6 billion in 1999, says Barclays Capital, the securities unit of Barclays PLC....

Since early 2005, the crude-oil market is in what traders call contango, meaning futures contracts for a given product are priced higher than that same good for near-term delivery. The price of oil to be delivered four months from now is about $3 more than oil to be delivered next month.
Flooded oil storage near Port Arthur, Texas
oil_storage2.jpg

In short, it pays for refiners and other oil-market players to buy and hold oil now to sell it down the road. Making that trading opportunity possible, says Colorado-based oil analyst Philip K. Verleger, is the huge volume of new buyers on the other side: investors who he estimates have put more than $60 billion into U.S. crude-oil futures since 2004.

Indeed, San Antonio-based Valero has been operating with its crude tanks full since the start of the year. When the market is in contango, "you tend to operate at the top of your tanks," says Bob Beadle, Valero's senior vice president in charge of crude oil, supply and trading. Mr. Beadle estimates that in the U.S., the difference between the industry operating at full tanks and at minimum operating levels amounts to as much as 75 million barrels of oil, or about three days of supply.

 

[mtzianos]

More on the same subject:

http://www.rferl.org/featuresarticle/2006/04/FF6F88B2-9F0C-4913-B4D0-5ED2A705D514.html
Interview: Oil Expert Explains What's Driving Record High Prices
By Jeffrey Donovan
Azerbaijan -- Caspian oil derricks, pollution
(AFP)
Oil prices have climbed steadily since 2004, and today they rose again to new record highs of more than $74 a barrel. What's driving prices -- and can they be brought back down? Government officials and oil executives from more than 65 nations will be asking those same questions when they gather in Qatar on April 22-23 at a meeting of the International Energy Forum. Among the factors driving prices up are fears over possible supply disruption in major oil-producing states such as Iran, Iraq, and Nigeria, where a rebel offensive has cut off one-quarter of output.

PRAGUE, April 20, 2006 (RFE/RL) -- RFE/RL spoke with Leo Drollas, the deputy director and chief economist of London's Center for Global Energy Studies.

RFE/RL: The price of oil continues to climb to record highs. Analysts say fears over the Iranian nuclear crisis is one of only several issues driving up prices. Iranian President Mahmud Ahmadinejad only strengthened those fears on April 19, when he said oil prices are still below their true levels. What's your take?

Leo Drollas: The first thing we must say is that these high prices are really paper prices, in a sense for paper oil, they're not the prompt market -- that is, for real wet barrels, as we call them. So they're obviously driven a lot by news and by sentiment, and they refer to oil that is bought and sold months ahead through paper contracts. And these prices move quite quickly on news, and the news is bad at the moment for oil because of the Iranian standoff, because of problems continuing in Nigeria, and many other factors in the market.

RFE/RL: So you're saying that, beyond fears over Iran or supply disruptions in Nigeria, the futures market is driving up prices?

Drollas: There's a lot of money that has come into the oil market over the last few years. The money that is now tracking commodity indices has increased from about $8 billion in 2001 to about $70 billion today. So we've got a huge influx of money into commodity-tracking indices, and a large part of those indices of course refer to oil. So we've got a lot of speculative money or hedge-fund money or other kinds of investors coming into oil, thinking they're on a roll now and that oil prices will forever increase. And in a sense, this tends to fulfill the prophecy, as long as the money keeps coming in.

RFE/RL: How does that drive prices, exactly?

Drollas: What tends to happen is that the futures prices, especially for months further out, tend to rise, and they create a difference between future prices for outer months and spot prices for oil, especially for "wet" barrels. And this differential encourages people to buy physical oil, and therefore, the pressure from the futures market is transmitted to the actual spot market for oil.

RFE/RL: But isn't capacity part of the problem as well, both in terms of the actual supply of oil and the fact that, particularly in the United States, refining capacity is down, with some refining facilities still not fully recovered from last summer's Hurricane Katrina?

Drollas: Well, this is the huge, unanswerable question as to what component of this price run-up is due to speculation, as we call it, or due to real fundamental factors. My own gut feeling is that maybe $15 [per barrel] or so at the moment is due to these kind of pressures from the futures market, from speculation if you like. In other words, the price should have been quite a bit lower than that, because there isn't actually a physical shortage of oil at this very moment.

RFE/RL: So this gets us back, perhaps, to emotions -- to fears over possible supply disruptions due to crises in key producing countries, such as Iran, Nigeria, Iraq.

Drollas: Of course, the fear is there because of these factors: Iran and Nigeria in particular, and also Venezuela to some extent in the background. But one must bear in mind that there is a physical problem too, in the sense that the spare capacity to produce crude oil in the world is under 3 percent of global demand for oil. And a business that runs with such little spare capacity is vulnerable to all kinds of events that make people worry or fear whether the system is able to cope with the pressures that are put on it in, let's say, the autumn or the winter that we have ahead of us.

RFE/RL: Now, what about demand? Isn't the growing thirst for oil from China part of what's driving prices as well?

Drollas: Well, demand triggered, of course, this crisis that started in 2004, but demand is growing, but a lot less than it did in 2004. So demand is still a factor, but it's not the driving force at the moment. We've gone back in the last few months to an old-fashioned supply problem with the loss of supplies from Nigeria and of course, the potential loss of supplies due to the Iranian crisis. So we've gone back in a sense to a real supply problem, although the demand side triggered the crisis.

RFE/RL: For oil-producing countries, the crisis appears to be a windfall. But are there any negative economic effects on major producers, such as Russia?

Drollas: First of all, we can easily say that this has been a tremendous boon to the Russian economy, and to Russian state finances. First of all, because of the high oil prices, secondly, because these high prices have pulled up gas prices, and Russia is a great exporter of gas also. And, thirdly, the state taxation system is progressive. So as the price of oil rises, so the revenues received by the state increase more than proportionately. So there's been a huge influx of funds into the state system. Presumably, it's spending it of course domestically, and that has helped the Russian citizen. On the other hand, the downside is that the Russian ruble has appreciated, and this of course harms other Russian exports. But at the moment, the benefits from oil and gas far outweigh any negative sides.

RFE/RL: Presumably, the same goes for the other oil and gas producers in the region?

Drollas: Kazakhstan, Turkmenistan, Azerbaijan -- all these producers of oil or gas would obviously benefit, just like Russia does. But other countries that do not have oil or gas who are in fact importers of oil or gas, would obviously suffer considerably. And that is the big downside, actually worldwide. And there are far more countries in the world that import oil and or gas than there are that produce them. So really, the impact is eventually negative on world economic growth, but it just takes time for it to appear.

RFE/RL: Given the duration of the current oil crisis, it would seem that we should probably just get used to high prices, perhaps indefinitely. Is this case?

Drollas: This year we'll certainly have prices high -- higher than last year. But this in turn creates its own solutions, if you like, and prices will be lower in the future. In the next three of four years, I would think they'll certainly be lower because demand will be curtailed sufficiently and supplies eventually will be forthcoming -- unless, of course, there's continuing political unrest that goes on for a decade, which would eventually cause a worldwide recession.

 

[mtzianos]

Oil is a financial bubble, it has been documented to death, everyone knows it and for some reason TPTB pretend it's not there.

This happens due to broken price discovery mechanism.

Even oil producers are saying it LOUD AND CLEAR for for the past 1.5yr:

Yesterday from Reuters:

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http://today.reuters.com/news/newsA...=&cap=&sz=13&WTModLoc=NewsArt-C1-ArticlePage4

Saudi cut shows record oil defies market logic
Wed Jun 28, 2006 11:58am ET167

By Peg Mackey and Janet McBride

LONDON (Reuters) - Oil power Saudi Arabia has offered the most compelling proof yet that record high prices are divorced from the realities of supply and demand.

The world's biggest crude exporter dared to make a huge cut in its production through the second quarter but growing demand for oil was still satisfied.

From July 2004 to March 2006 the kingdom had been pumping well in excess of 9 million barrels per day, in part to keep the world's top two consumers the United States and China supplied.

In that time global oil stocks have risen to their highest in 20 years and U.S. stocks are at an 8-year high -- persuasive evidence that inventories have become a more reliable indicator of whether producers are pumping too much or too little.

According to the International Energy Agency, adviser to the West on energy, OECD countries had enough crude oil in reserve in March to keep their refineries running for 25.9 days -- well above the norm. Crude oil stocks have risen further since then.

"There is absolutely no relationship between price and supply and demand," Saudi Oil Minister Ali Al-Naimi noted. He told pan-Arab newspaper Al Hayat in early June that crude oil was worth no more than $50 a barrel based on fundamentals.

He has repeatedly said the oil price is determined by the multi-billion dollar market that brings together oil companies, traders, investment and hedge funds.