Oil Prices

[Rovinghawk]

c) We hear it is all about the value of the dollar.............. Bull

c) If that is the case then oil has dropped from in excess of $120 a barrel to $67. Has the dollar devalued that much? No it hasn't and it is all bull.

Devaluation of the dollar would mean you need more of them to buy a barrel, not fewer. This supports your argument but suggests you haven't fully thought it through.

RH

 

[glojo]

Devaluation of the dollar would mean you need more of them to buy a barrel, not fewer. This supports your argument but suggests you haven't fully thought it through.

RH

I'm always high as a kite on morphine so when I say down you had best stand up

I'm glad you got the gist of where I'm coming from though

$67 dollars and still falling

 

[PXW]

I think we are being conned day after day after day after day.

a) We hear that oil prices are so expensive because of the cost of exploration...... Bull

b) We hear that it is all about supply and demand..... Bull

c) We hear it is all about the value of the dollar.............. Bull


I say this because

a) If the exploration costs were truly so expensive then they would not be selling oil at such a loss Today it is $67 a barrel and falling

b) The flow is being controlled by the producers. They can EASILY match any demand if it were in their interests

c) If that is the case then oil has dropped from in excess of $120 a barrel to $67. Has the dollar devalued that much? No it hasn't and it is all bull.

As I said earlier the Brazilian will soon be producing oil and they will be a major, major exporter that can easily compete with the biggest suppliers.

Is anyone going to hazard a guess at where the price will settle?

Does the drop match the fall in price?

All along I maintained the $120 barrel was pure greed , greed pure and
simple but some folks insisted it was down to oil shortage, supply and demand etc etc. I still maintain it was greed and I suspect the producers are biding their time and waiting to put prices back up. Russia has flexed its military muscle. It did this because it could afford to, it did this because it is a major supplier of oil. It started to refinance its military and oil dropping to the values we are now seeing might make this effort unsupportable. Russia has tasted power and I doubt they will walk away. watch this space.

Has anyone heard any firm news regarding the South Atlantic? It seems strange how quiet it has all gone! Weird in fact.

Regards
John

a) We hear that oil prices are so expensive because of the cost of exploration...... Bull

No. Genuine. At least, the costs of exploration have risen hugely both for market and technical reasons

b) We hear that it is all about supply and demand..... Bull

I've tried to explain this a number of times. Sorry I don't seem to be being clear enough. At the margin (which is where the market is placed) it IS about supply and demand. Sorry if that doesn't suit the arguments being run on here, but there you go....

c) We hear it is all about the value of the dollar.............. Bull

The dollar has actually strengthened against sterling by over 17% in the last few weeks, thus markedly increasing the sterling costs of oil products (which are US$ denominated). How can I put this simply? If a product costs $100 and the exchange rate is $2.10/£, then it costs £47.62. If a product costs $100 and the exchange rate is $1.74/£ then it now costs £57.47. That's a 20% price increase ni sterling with no product price change at all.

You also confuse exploration costs and production costs. Broadly the process is that blocks of territory are auctioned off for exploration. During this phase the oil company drills exploration wells and hopes to make discoveries of commeically viable quantities of oil or gas. It will also do other studies such as seismic, 3 D seismic etc etc.

Once the field has been found and the reserves quantified and declared viable then the process moves into development spend. Many more billions are spent on developing field and transit infrastructure to procude the oil and get it to market.

Only then do you get production spend - the ongoing costs of producing from that field or reservoir.

Clearly the first two categories are sunk costs by the tiem the field is up and running. Production shut-in would only occur economically if the oil price fell below the per barrel cost of PRODUCTION.

Happy to continue to feed this thread with real world info on the oil business, (having spent 20 years working in that industry) but if folks want to turn it into a general rant about greed, then I'm afraid I'm out

 

[glojo]

You also confuse exploration costs and production costs. Broadly the process is that blocks of territory are auctioned off for exploration. During this phase the oil company drills exploration wells and hopes to make discoveries of commeically viable quantities of oil or gas. It will also do other studies such as seismic, 3 D seismic etc etc.

Once the field has been found and the reserves quantified and declared viable then the process moves into development spend. Many more billions are spent on developing field and transit infrastructure to procude the oil and get it to market.

Only then do you get production spend - the ongoing costs of producing from that field or reservoir.

My point is what has changed, what has changed that a) justified $120 for a barrel of oil and b) what has changed to justify the fall to $67? I am not talking about the wheeler dealing, I am not talking about trading I am simply talking about the exploration and recovery of this product. What has happened to justify this huge variance?

I can understand the wheeler dealing, i can understand the greed and to me this could be controlled by governments IF they wanted it. I just don't understand how you are anyone else can try and pretend there is either a shortage or it cost so much to recover. I say this because when it was $127 a barrel I was told on this forum that that was the cost that was needed to make a profit on the production of this product. That is either true then or it is not.

Hopefully this is not a rant and have you heard about the South Atlantic fields? (if any)

Regards
Ranting John O'Dare

 

[PXW]

No-one denies that a lot of money is made at $120/bbl - but it isn't driven by oil co greed. If you want more on the economics, history, location of reserves, amount/location of consumption then try here . Dont be put off by the fact that this is on a BP website - it's the best and most authoritative review around.

As I have said before, both crude oil and refined oil products are commoditised products. In any commodity market a small over or under supply can have a dramatic effect on prices. In a market as developed as the oil market, where there is much oil-based derivatives trading, the belief that there might be an over or under supply can move prices just as easily (and out of the control of the oil companies). Hence, middle east tensions, iraq war etc - price goes up, in anticipation of tighter supply - even if it never happens.

 

[raymont]

There was commodity trading based froth in the oil price.

Demand had / has increased, just look at China and other Emerging economies. Increased demand does produce a higher price. This was a real reason for higher prices.

Prices are dropping because the commodity markets perceive that demand will slacken because of global economic slowdown / recession / depression. This doesn’t actually have to happen for the price to drop, it’s enough that the traders thing it will.

Exploration etc is very expensive and has to be paid for.

Sterling dropping against the dollar does arithmetically produce a higher price in Sterling.

 

[glojo]

Hi PXW,
Thank you very much for the link and finally we are seeing experts publicly stating what I have been trying to say and what folks here scoff at:


Peak Oil: A metaphor for Anxiety

Speaker: Dr Michael C Daly
Speech date: 10 September 2007
Venue: Geological Society Bicentenery Conference, London
Title: GVP, Exploration & LTR

Mr President, Ladies and Gentlemen I am honoured to have been asked to talk at the Bicentennial of the Geological Society, particularly about a subject as profound as the future of oil.

I was asked to talk about oil supply after peak oil. However, I don't accept the premise. It is far from clear to me when there will be a peak to oil supply, at least one driven by a fundamental resource shortage.

I believe, from what I know today, that peak oil supply is still a long way off. However, we may face a peak demand for oil first.

As someone who is constantly in search of new fields and frequently in negotiations for access to new areas to explore in, my perspective is different.

There remains a wealth of resources to develop and explore for. I see no limitation arising from geology or resources, technology or capability. These are issues solvable with good science, great people and new technology.

I have not posted the full article and we should all accept that recovering oil is not cheap, but once the process has been completed then never is the term liquid gold more apt.

I have taken stick for saying we are not in any danger of oil running out and finally we see an expert being invited to talk on this topic.

Only an idiot would deny that it is the commodities market\traders that have the biggest effect on the price but once again whyh? Why allow them to play with us in the way they are? Look at the huge influences they have on our lives, our businesses.

Let's stick with BP.

They explore for oil, they drill for oil, they extract the oil, they can then sell this product or refine it, but the crazy thing is that if they sell it on the commodities market.....?? (question)

They then eventually buy it back to refine it?????? Why are they playing this game? Why are they selling a product for 'X' amount and then three months later buying it back at 'Y' amount and then either refining it, or if they have refined it and then sold\bought it back why??? Why involve these traders? BP drills the oil, refines the oil and eventually sells the oil. Why put in the trader? Why even allow these vultures to make such obscene profits? (question)

I had a very brief look for the South Atlantic areas but I failed miserably to find anything.

Thanks again for the excellent input

Yours sincerely
John the trader

 

[raymont]

b) We hear that it is all about supply and demand..... Bull

I believe, from what I know today, that peak oil supply is still a long way off. However, we may face a peak demand for oil first.

Which is why it isn't bull.

 

[BTB 500]

There are companies that explore & produce crude, but do not refine. Hence they sell all their crude.

There are companies that refine, but do not have E & P. Hence they have to buy all their crude.

Other companies do both, but usually have to buy additional crude (to refine) on the open market.

Dieselman posted a link to this interesting article previously:

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3985479.ece

As one of the largest oil companies in the world, Shell still only produces 3% of the world's crude.

 

[glojo]

b) We hear that it is all about supply and demand..... Bull

I believe, from what I know today, that peak oil supply is still a long way off. However, we may face a peak demand for oil first.

Which is why it isn't bull.

No the man was extremely careful in the woirds he used. Peak oil supply is stillk a long way off.

We MAY...................... face a peak demand for oil first.

That is the politicians 'cop out' type reply and hopefully we would all agree with that statement as it is merely belt and braces talk.

If we all bought large gas guzzling V8 cars and had four cars per family and we all went on four foreign holidays per year then that would possibly eventually lead to a bottleneck, but my guess would be that we would see more refineiries coming on line if there was a long term bottleneck??? (question)

My point was that I simply stated there was not a shortage of oil and it was definitely not going to run out in my lifetime or my childrens. I was very quickly poo hoo'd by folks that said I was talking rubbish.

 

[Rovinghawk]

Why involve these traders?

You'd have to ask the guys at the top- I'd suggest that the men running Shell, BP et al aren't entirely stupid & wouldn't do it without good reason if it involved billions of pounds of lost profit.

BP drills the oil, refines the oil and eventually sells the oil. Why put in the trader?

As above

Why even allow these vultures to make such obscene profits?

Vultures? Do you think that emotive name-calling has a place in an economic debate? It's like GM products being called 'Frankenstein foods'- a simplification to pander to prejudices of pressure groups.

Also, would you please define an 'obscene' profit? If you object to their margins, stop buying their product. If your lifestyle won't allow you to stop, join an eco-commune and live without heat, light or transportation; otherwise, accept things as they are.
Alternatively, go into the oil business yourself- if you only make non-obscene profits you'll undercut them and have market dominance in no time at all.

RH

 

[glojo]

Also, would you please define an 'obscene' profit?

An obscene profit is when someone has a commodity that we all need and they inflate the price because they know we have to have it and they know we will have to pay the price. That is obscene and may they be answerable when they make that last parade.

How many businesses have gone under because of the recent fuel price increases?
How many hauliers have gone bankrupt or are now working excessive or illegal hours just to make ends meet? All because of the crazy prices we are seeing.

Do you seriously think those so called big boses of BP or any other organisation are going to say they were involved in these price hikes? All you will hear from them is how they never make a profit from selling fuel

I think the profits being made from the hugely inflated prices of oil, were obscene, but I suppose that is capitalism and a company has a duty to its share holders to make a profit.

If BP were not making any profit when trading in oil at $127 then how can they possibly sell the same thing only weeks later at $67 and still be in business?

I am playing devils advocate here and trying toi get justifiable reasons for what we are seeing but so far..........

 

[PXW]

Do you seriously think those so called big boses of BP or any other organisation are going to say they were involved in these price hikes? All you will hear from them is how they never make a profit from selling fuel

I think the profits being made from the hugely inflated prices of oil, were obscene, but I suppose that is capitalism and a company has a duty to its share holders to make a profit.

If BP were not making any profit when trading in oil at $127 then how can they possibly sell the same thing only weeks later at $67 and still be in business?

I am playing devils advocate here and trying toi get justifiable reasons for what we are seeing but so far..........

Just to unpick this a little bit - yes oil companies will say that they make little or no profit on fuel sales. This is true. At the retail end of the business it is incredibly competitive, and it's not unheard of for a company to make less money on the full tank of fuel than it does on the mars bar you pick up at the counter.

One stage further up the line is the refining business. The BP report link shows refining margins, and whilst recent US Gulf Coast west texas sour crude refining has had decent but very volatile margins recently, for the most part companies are doing well to see a margin of $5/bbl on refining. The refinery business buys crude at market rates and sells refined product at market rates, so it really is a margin business.

Further up the chain still you have the E&P activity. This is pretty much as I explained above, and is where your $120->67/bbl comes in. Yes, the companies make big money here in the so-called upstream business. But refining and marketing will often make little or zero.

So - the oft-asked question - why can't BP or Shell etc use some of those big upstream profits to cut the fuel price at the pump? The blunt asnwer is that they would love to but it would be illegal. Competition law (or antitrust law as it is known in the US) forbids it. In fact, the origin of antitrust law was exactly this scenario, with Rockefeller being forced to break up Standard Oil into smaller companies, such as Sohio (Standard oil of Ohio - now part of BP), Standard Oil of New Jersey (now the Exxon part of ExxonMobil; btw - 'ESSO' was Eastern States Standard oil) Standard Oil Company of New York - SOCONY - which became Mobil; Standard Oil of Indiana, became Amoco, now part of BP; Standard Oil of California, became Chevron. COntinental Oil CO became COnoco, now ConocoPhilips. Atlantic Oil Co merged with Richfields to form ARCO, now also part of BP. It's a fascinating history!

 

[BTB 500]

The big multinational oil companies make profits in other fields too e.g. chemicals, trading, shipping, gas, energy ... even unexpected things like coal, solar & wind power, forestry, etc.

 

[Dieselman]

The big multinational oil companies make profits in other fields too e.g. chemicals, trading, shipping, gas, energy ... even unexpected things like coal, solar & wind power, forestry, etc.

Not forgetting hot air and smoke screens..

 

[hawk20]

Diamonds don't sell at their cost of production. Nor do many other products, including oil. Supply and demand determines the price.

Some months back the value of the dollar was collapsing. Investors got out of dollar assets and bought commodiites instead (gold, oil, even food crops all went through the roof). Now the dollar is doing OK again, the investors and speculators are back out of oil (and oil futures) and gold is dropping too.

I posted ages ago on another thread, when oil was going to $147 per barrel, that there was no more world demand for consumption than there had been when oil was $75 per barrel. The extra demand was coming from speculators and also from investors too scared to hold dollars. Now that has gone the price has returned to a more sensible level reflecting demand for use (rather than speculation) -and supply.

 

[NewMB]

And before you know it, the rate of a barrel will be down to $45-60. The right price IMO.

Probably will take the UK stations ages to reflect this.... as always!

 

[raymont]

Be careful what you wish for.

A falling oil price will, after a while, lead to lower pump prices. However, given the % of the price we pay that’s tax the drop will be limited. If it falls far enough Crash Gordon will see an opportunity to raise some revenue, which he so desperately needs, by fuel duty rises.

More importantly if the oil price continues to drop and stays low then it’s because the world, and our, economy is in deep trouble. This means unemployment and possibly stagflation which is bad for individuals and companies alike.

On balance I think I’d rather pay more for fuel and have a job, be able to maintain the value of savings, pensions etc.

 

[glojo]

On balance I think I’d rather pay more for fuel and have a job, be able to maintain the value of savings, pensions etc.

I fear your wish will soon be granted. Has the price of a barrel of oil gone up? I hear it was $69 this morning. OPEC are meeting next week and they may well consider restricting the flow to effect the price.

John

 

[raymont]

I fear your wish will soon be granted. Has the price of a barrel of oil gone up? I hear it was $69 this morning. OPEC are meeting next week and they may well consider restricting the flow to effect the price.

John

I think OPEC account for less than 50% of crude. OPEC has often made statements about restricting flow or, in other circumsatnces, increasing it. In practice little happens, one or more members break ranks and then all bets are off. Such a disparate collection of countries conflicting agendas are almost inevitable.