Re: Oil to Plunge Below $25 Next Year, Merrill Lynch Says

mg wrote:
On Dec 8, 4:28 am, Alan Lichtenstein <a...@xxxxxxxxx> wrote:

mg wrote:

( previous post snipped-follow thread )




Interesting response. Obviously, the rhetorical question Jeff asks
regarding the costs of obtaining the resource, includes an error in
asserting that that somehow the costs of production remain constant
despite the price on the open market. They don't. As fields are
depleted, the costs of obtaining the resource increase, so since costs
increase, obviously, the price should increase. Now the question is the
price of oil increasing in proportion to the increased costs of
production, or by some exponential number? Clearly, as the price of a
barrel of oil is currently, as compared to this past summer, the answer
is that the cost increased exponentially, and out of proportion to the
costs of production. But that is really irrelevant to the question that
Jeff raises, anyway. Fact remains that most sources reach consensus on
the previous summer's spike in the price of crude in the future's market
as being due to speculation and hedging by large investors who never had
any intention of taking delivery of the resource. They were only
hedging their bets against the developing financial meltdown. But
regulations can preclude similar speculation in the future's markets,
now that we know it may occur.

My point is that when markets are susceptible to outside speculation,
which causes the markets to operate not on any normal variables, the
problem is NOT with either the producer or the supplier, or even with
the seller of the lease, but with the market. And the problem should be
addressed as such. Regulation will prevent any but normal market forces

from operating. So that, yes, Exxon can sell it for what the market

will pay, but the market will not generate prices on any other than
normal and usual market forces with respect to the commodity.

I believe that whenever supply gets close to demand, especially with a
finite resource like oil, it's possible, if not probably, that a
speculative bubble will follow. So, even though I agree that the
speculative bubble was a big problem and was undoubtedly the reason
for the big spike in prices, I don't view it as the root cause.

I think the root cause for the high prices was limited supply and the
fear factor resulting from the war and instability in the Middle East
and a president who talked about WWIII with Iran, for example.

Obviously, political instability affects the supply, and if demand
doesn't decrease accordingly, the price will rise.


I believe that war and the threat of more war in the Middle East will
cause oil prices to rise whether or not the supply is actually
affected.

War has always been used as an excuse for increased prices. Where the effects of war have resulted in real impediments to maintaining supply for consumers as opposed to military uses, then the price has increased. But where those vagaries have not resulted in real impediments to supply, then the prices increases, IMHO, have been artificial, and only served as an excuse for providing excess profits for the oil companies.

That's simply
another variable to the supply and demand variables that determine
market price. I would suggest, however, that your assumption is not
shared by most analysts who wrote on the subject at the time. True,
inventories as compared to demand were low, thus explaining an increase
in price, but the actual increase in price was far in excess of what
market forces would have anticipated.


I personally agree that speculation was a major cause of the excessive
oil prices, but I don't think that's a universal opinion and I don't
think it can be proved either way. My focus, though, would be on the
causes of the speculation.

As I mentioned above, the causes of the most recent speculation were due to risk aversion in the equity markets and a flight to safety, due to the uncertain fallout from the mortgage crisis and the related derivative volatility. Investors simply wanted to achieve a good return on their dollars, and with the uncertainty in the equity markets looked for and found an alternative in the commodity market. However, as we have seen, that proved even more volatile, and only short term, as the increased variable of the value of the dollar, provided too much volatility for those investors in that market.

I don't know how much the price of oil should go up in relation to a
shortfall in supply or who should decide. In addition market prices
are often based on perception rather than the actual supply or actual
demand and a on the prediction or fear of the future. In regard to
actual shortages, though, U.S. Energy Secretary Samuel Bodman said.
"In the absence of any additional crude supply, for every 1 percent of
crude demand, we will expect a 20 percent increase in price in order
to balance the market."

That may be true, and represents the 'normal' market factors of which I spoke earlier. But the commodity markets, especially with regard to oil futures, is also dependent on the value of the dollar. That cannot be ignored, and in fact, is the major determiner effecting the price of a barrel of oil at the present time.

I believe most of the problems we are encountering right now are a
result of the right wing doing things differently than they have
traditionally been done in the past and their failure to anticipate
unintended consequences. The right wing has adopted a strategy that
deficits don't matter. We are told that tax cuts pay for themselves.
Bush has established a doctrine of preemptive war against countries
who aren't a threat. Bush says we are supposed to spread democracy
around the world. Banks were allowed to consolidate to the point where
they are to big to fail. Predatory lending practices were ignored in
the name of free enterprise. Investment firms were allowed to leverage
at 40 to 1. That's not the way America did things in the past.

Now you're moving from the market to government policy. What you post above, I happen to agree with, but it has no relationship to the discussion so far, that being the relation of markets and the price of oil. The U.S. Government, has not, at this juncture, done much of anything to influence those markets. It is still not clear whether Bush instituted a war over oil, although, a case has been made for it, but IMHO, not as strong as we would like. True, Bush's favoring of big business, the oil company in particular is a basis for strong conjecture, but beyond that, there's not much hard evidence to verify it. In fact, the conjecture is just as strong when one starts off with Bush's religious zealousness and personal ideology as a rationale.

I would hate to see the left wing make the same mistakes by changing
the way the futures and equity markets work, for instance, and
ignoring the potential unintended consequences. Oil isn't the only
thing that went up during the recent boom/bubble. All sorts of
commodities also went way up like gold, copper, lumber, insulation,
fertilizer, and agricultural products. If the government regulates the
oil futures market, it will presumably have to regulate the other
futures markets also. As a retiree, for instance, one of the best
options I have to protect myself against an irresponsible government
that debases it's currency and inflates it's money supply is to
purchase commodity futures and I wouldn't be in favor of them limiting
or eliminating my ability to do so. There are other unintended
consequences of the US government interfering with the futures market
that people might not even think about. The market could, for example,
be moved out of the U.S. to another country if government tinkering
became excessive. What would Uncle Sam do then? Would he prohibit me
from investing in foreign markets?

The major reason for the oil bubble this past summer, was entry into the commodity market by speculators, most notably, large investors who traditionally played in the equity markets and who never intended to take delivery on any of the commodities. Such speculation can be prevented by the establishment of regulations to preclude that speculation.

People have different opinions on what will happen in the future.
That's what makes markets. I believe, for instance, that there will be
commodity shortages in the future. As a result, prices will probably
go way beyond what many people think they should be and there will be
times when prices go way below what they should be and the government
will be tempted to intervene in the traditional market mechanism and I
think that would be a mistake.

I agree, but those shortages, if not artificially contrived, are determined by supply and demand. I can live with prices that are the results of real supply and demand. IMHO, I think government intervention is warranted only if the public needs a commodity, and the prices established by normal supply and demand of the marketplace would price the majority of the public out of acquisition of that commodity. Hence, rationing, so that the entire public can get their fair share, and not have to alter their lifestyles so the rich can benefit. We're not there yet, and if we establish the alternative energy, particularly for personal transportation vehicles, we hopefully, never will be. That is the difference between what the Left wants and the Right wants. The Left wants an energy supply so that the majority won't have to alter their lifestyles, and the right wants an energy supply that only the wealthy can afford.

There was no question that
increased speculation, coupled with a declining value of the dollar
spiked the price to the levels that it rose to. When the dollar began
its decline, the price dropped, even initially in the face of low
inventories. And as demand declined, the price dropped further, helped
by a concomitant increase in the value of the dollar in the currency
markets. If the dollar continues its increase in value, which at this
point is not clear, the price of oil will continue to drop, even if
demand remains relatively constant, AND supply is diminished. OPEC's
recent reduction in supply is an attempt to stabilize the price of oil
in the face of anticipated decline in demand as well as in the increase
in the value of the dollar.

Speculators, in the face of an anticipated recession, which we now
officially know was present even last summer, moved their money from
equities into what they considered a good investment; oil futures. And
they were rewarded for the short term, until the economic climate
worsened, and they decided that a lower return in Treasuries would
benefit them. In effect, these large investors used the futures market
as they would the equity markets, causing the bubble.

So, unless we go to war with Iran, and supplies are somehow reduced,
which even if that occurs, is problematical, as Iran does not have the
naval resources to interdict shipping, the factors I mentioned should
play the prominent role in determining oil prices. Regrettably, we
haven't put needed regulations into place which would preclude large
investors, such as pension funds and hedge funds from using the futures
markets to offset volatility in the equity markets.



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