Real Name: Ernie Cash Member Since: November 11, 2007 Last Signed In: September 04, 2008 Profile Views: 592 Blog Views: 582 A Score Card for Decision 2008 Fixing America's Problems Oil Companies Going Green!! The High Cost of Misinformation Fifteen Minutes of Fame Is Anyone So Type A Indispensable? Despair, Desperation or Depression - Decision 2008 Building Bridges - A Special Event February 08 March 08 April 08 May 08 June 08 July 08 August 08 September 08 
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The High Cost of Misinformation
Well, ‘tis the season…. Yes, it’s election season again and as we all know, the candidates are in full rut mating regalia looking for “friends.” As any psychologist can tell you, one of the easiest and quickest ways to make new friends is to find a common enemy. Enter Big Oil, stage left.
In the current flux surrounding crude oil prices and the ever increasing cost of gasoline, the oil companies reporting record profits have emerged as one of the favorite whipping boys for politcos and candidates who are finding ready allies among citizens hard hit by $4/gal gasoline. Works like a charm too as long as certain facts are ignored, which they certainly are by those wishing to exploit the common-enemy avenue to secure more votes in November.
Here’s the kicker: Petroleum prices are regulated by a little thing we in the capitalistic society of America like to call “Supply and Demand.”
I know. I know. It’s a shocker and completely unheard of in a capitalistic economy but suck it up, my friends, it’s the facts. __ [click] _/_ “Sarcasm mode is now disengaged.”
Even more correctly, petroleum prices are set by current events and how those events are likely to affect the future price of a barrel of oil. That’s called futures trading on the commodity markets and I’ll leave the discussion of how acceptable that practice is to the SEC and their ilk but several events can affect what price these speculators are willing to pay for oil at some time in the future and, as we all should know, the resulting price of gasoline, diesel, heating oil, fertilizer, plastics and hundreds of other products derived from crude oil – including the Vaseline so many of us feel in need of presently. And again, I leave that image to your imagination.
The events affecting crude prices include such things as: social unrest or political strife in oil producing/exporting countries, revelations of significant new discoveries of petroleum reserves that promise increasing supplies, emerging economies indicating increasing demand and promising supplies of alternative sources of new energy sources.
Let’s take a look at these:
Social unrest or political strife in oil producing/exporting countries: Need I even mention the Iraq War, terrorism, continuing social and political unrest in the Middle East (like, 3000 years worth of unrest)? All with the net effect of increasing petroleum prices.
New discoveries that promise to increase supplies: There are several: ANWR, offshore reserves in the Pacific and Atlantic, Russian and Chinese emerging production, discoveries of oil shales in N. Dakota, Montana, Wyoming and Colorado. Unfortunately our congress has recently disallowed the exploration and development of known petroleum reserves in ANWR and off both coasts. And the development of the heavy oil shales in the Midwest will require technologies and methodologies that are more expensive than those for current “routine” drilling and production. That being the case, prices will have to remain elevated for these discoveries to prove viable for the oil companies to pursue with some expectation of profit. So the net effect of events that would normally tend to send prices downward have instead been rendered, at best, moot by our government or have even become a force sending crude prices higher yet.
Emerging economies: China, Russia, India, Argentina, and a host of others. While China and Russia are emerging as suppliers of oil and gas, the new demands they’re placing on the market as emerging economies have outstripped the supplies they’re adding to it. Net effect – increasing oil prices.
Finally there is the much touted development of alternative energy sources and supplies. In short, it is to smile. The fact remains that current alternatives are 1) barely competitive with crude oil at current levels, 2) no where near a point in their development to even significantly affect the demand for petroleum in the near term and 3) largely unproven (as in the case of the current legislation to increase ethanol production when we are not even yet sure that it’s a viable alternative). Net effect – increasing oil prices.
Doesn’t leave much room for the expectation of falling oil prices does it?
Now some will probably argue that I make these arguments in light of my affinity to the oil industry. I freely admit that the energy industry has provided my living and sustenance for my family for nearly thirty years but nothing could be further from the truth than stating I cite these facts out of personal interest. With any luck I plan to retire from “the patch” in a year, give or take, and I have every confidence that the oil business will continue to make my pension for as long as I’m bound by this mortal coil. I would like to see the development of alternative “green” energy sources, particularly nuclear, as much as the next person – well, ok. Maybe not as much as your die-hard tree hugger but still, $4/gallon costs me as much as it does the butcher, the baker and the candlestick maker. But I have no concerns that my pension is in danger from these sources because 1) my company will adapt as it always has and actually is currently and has been for years the leader in technological advances within the energy industry and 2) oil isn’t going anywhere anytime soon except into the same fuel tanks it’s been going into for 70 years. My posting of these facts is simply a matter of following that age old advice to write about what you know.
So next time you’re wincing from the $80 price tag for fueling your Suburban, if you feel the need to vent somewhere, thank an environmentalist – not an oil company.
More about where your gasoline dollar goes in the next installment.
I’m sure you’re all waiting with bated breath…. :-)
Ernie
9 comments from 4 users
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posted by
Luminary
on May 25, 2008 at 05:29 PM
& nbsp; You can see the current spot price of crude oil, Brent, RBOB gasoline, Heating Oil, Nat Gas, gold, silver, copper at NYMEX.com It just started trading a few minutes ago and crude is down .60 cents a barrel right this sec, but it really fluctuates wildly, so if you go there it might down a lot more or up. Who knows? posted by
Luminary
on May 25, 2008 at 05:22 PM
Hey Ernie, if you really want to see how confusing and complicated the crude oil market is check out commodityonline.com and today's story Why Crude OIl Price Is Zooming My major worry is if a new problems with Iran, a major hurricane, and Al-Qaida attack, a failed platform and so on happens. Roll the dice! posted by
ErnieCash
on May 25, 2008 at 10:32 AM
No, Luminary, it doesn't offend me at all. Just not sure I agree with the concept. Now killing an animal just to leave it lie there and rot, that does offend me but all the variations that have been concocted in the stock markets seem to me to be in that gray area. Not to mention that puts, calls, margin trading, options and futures and the like baffle me more than I'd like to admit. Frankly I'd like to see the stock exchanges limited to simply buying and selling corporate stocks and bonds without all the machinations that have been devised to, as I see it, swap money between the ones who place winning bets and those who place losing ones. But that's just me. As long as it's legal I can accept it even if I don't particularly understand all of it. I've been known to make a wager or two myself but that's only with my recreational money, certainly not with my retirement savings. Why just about every time I go to Louisiana I get another $200-$300 BlackJack lesson.... [sigh] Ernie posted by
ErnieCash
on May 25, 2008 at 10:14 AM
Good points, Bighorn, and I think you're right about the recession. Actually I think the economy would be well on its way to recovery right now if it were not for the price of oil going into the stratosphere. While the argument may be made that other prices are increasing as well I still believe that the bulk of those increases is tied, directly or indirectly, to the price of oil. One thing I have to admit though is that if this energy crunch gets people to slow down on the highways it will at least have served one useful purpose! I do a lot of driving in my work as well but I'm fortunate in that the company provides the vehicle and... ahem.... the fuel for it too. But being in the employ of a company that prides itself on its safety record, all our vehicles are fitted with electronic driving monitors. If I exceed 70 mph for more than three seconds I get a nice little "whoop-whoop" alarm that goes off (and, btw, will scare the bejesus out of ya if you happen to be planning your next blog post while driving to Rockport!) and a nice little ding on my driving report when the data is downloaded to the computers. But if you happen to come across another white Ford F150 being passed by everyone else on the road over the next few days, wave, it'll probably be me! Ernie posted by
Luminary
on May 25, 2008 at 10:06 AM
DUG is an etf that seeks daily investment results which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. It employs leveraged investment techniques. Ask yourself why Exxon, Conoco, BP and others have been going down the past few days? It is because a lot of people feel crude is about to break to the down side and that the current profit margins won't be sustainable. Gambling in the stock market is no more akin to killing an animal for sport and not dressing it than gambling on a football game. Longer term, later this year and beyond, yeah, crude may go to $200 or more. I won't hold DUG very long and I am just "playing" the market. Sorry if that offends you. posted by
bighorn
on May 25, 2008 at 07:13 AM
I don't see this "bubble busting" until our economy falls into a recession. FYI: The definition of recession is two quarters of back to back negative economic growth. To my knowledge, we have yet to experience one negative quarter. But the media would sure like us to. I travel via auto for a living and am feeling the crunch more than many. As a practice, I refuse to reduce my schedule while competitors do. My history has been to make more inroads during tough times than good. One thing I have done is reduce my speed from the 70-75mph range to 60-65. Having one of those handy onboard computers helped me recognize that I get 17-18 mpg at the higher speed, 19-21 mpg at the slower. For that savings, I can be 30 minutes late. Although driving back from Houston yesterday at about 64 mph almost got me run over several times. I passed 4 autos on the way in, and got passed by the world. This being a holiday weekend, I would have thought it would be a more leisurely pace. Just goes to show, don't slow down somebody headed out for a good time. And apparently fuel consumption expense is not a problem at those households. When I began traveling in 1985, I drove essentially the same thing I drive today. A Ford F-150 Supercab. Back then, I was a large vehicle on the road. Today, I'm just average sized and sometimes get blown away by F-250 4 door, 4WD diesels on the way to drop the kids at school. I think maybe we got spoiled to "cheap" fuel (relative to the inflation of our wages), got greedy and fat (ok, maybe just chubby), and gave our arab friends the keys to our future. And we know what great drivers they are.
posted by
ErnieCash
on May 24, 2008 at 11:28 PM
I have two very different opinions of the commodities markets. Yes, they do set petroleum prices but the prices they offer for crude contracts is only a reflection of what they expect the price to be. In other words, they aren't necessarily *determining* the price but rather just making (or losing) money on their best guess as to what price the market will bear. On that note it's difficult to fault them. But I have an aversion to those who buy and sell products they have no use for and indeed have no intention of ever even seeing. While it's difficult for me to explain, to me it's like a hunter killing a deer simply for the sake of killing with no intention of ever dressing out the animal. If I buy a company's stock it's because I have faith that company is well run, has a market for its products and will make a profit that I may share in by virtue of loaning the company an amount of my money to operate their business. Commodoties traders are simply saying, "I bet that come Monday you're going to be willing to pay $135 for the (concept of) the barrel I bought on Friday for $130." Luminary: While I do agree the current price spiral of crude is indeed a bubble, I'm not convinced that it's ready to burst. We saw this phenomenon with technology in the 90's and with housing and financials in '07 but those are domestic markets. You may argue that the tech bubble was global but the meteoric rise and heart stopping plunge that followed mostly involved domestic companies and causes/effects. The truly global petroleum market is much further removed from US control. While we hold quite a major influence in that market, we are very firmly planted only on the demand side while being only a minor player at best on the supply side. And sadly, we are hostage to our demand position - there is simply nothing that can currently and immediately change that scenario in our favor and the one door to having *any* significant effect was slammed shut by congress just last week. I don't think this bubble will burst until the rest of the world's demand-side players have the wherewithal to tell OPEC, et. al. they can take their oil and go pound sand. There will have to be some major changes take place before that action has a prayer of getting any response from the Saudis besides a haughty snicker. Ernie posted by
Luminary
on May 24, 2008 at 10:04 PM
I hear you Ernie and you certainly don't have to worry about your job security. However, the contrarian in me says this $130+ crude is a bubble that is about to burst. Let's see what demand destruction and profit taking does to the market. I'm going out on a limb here but I say come Monday morning and this next week we will see crude oil on the NYMEX trade substantially down. I put my money where my mouth is and made a bet on just that this past Thursday buying DUG. If I get bit I'll have a lot of company because there is a big lopsided trade on the short side of crude right now. Anyway, it's a lot better odds than Vegas will give you. After we give crude a big haircut I'll be back with you on the long side as the dollar fast becomes the Peso. posted by
victorianbybirth
on May 24, 2008 at 08:46 PM
I have been hearing the speculators are behind the soaring gas prices more than anything else lately. Is there anything anyone can do to put a muzzle on them? Also been hearing the "oil bubble" will be bursting some time next year & we should be ecstatic to have our $3.00 a gallon gas back.
I notice there are lots of trucks & suvs at the used car lots these days.....maybe these speculators are moonlighting environmentalists!
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