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wanttorun100
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 Posted: 09/14/06 - 10:41 Post subject: would this be a good or a bad thing?
Analysts and opinions are like bung holes - everyone has one and most of them stink
While I like the idea of $1.15 a gallon gasoline I'm not sure it would be such a good deal - esp considering what low price energy would do for coutries like China and the like.
| Quote: |
Analyst predicts plunge in gas prices
By Kevin G. Hall
McClatchy Newspapers
WASHINGTON — The recent sharp drop in the global price of crude oil could mark the start of a massive sell-off that returns gasoline prices to lows not seen since the late 1990s — perhaps as low as $1.15 a gallon.
"All the hurricane flags are flying" in oil markets, said Philip Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar. Now, he says, they appear to be poised for a dramatic plunge.
Crude-oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.
Here's why:
For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil-production capacity grew so tight that market players feared that any disruption to oil production could create shortages.
Fear of disruption focused on fighting in Nigeria, escalating tensions over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.
Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Large pension and commodities funds are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.
That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.
But many of the conditions that drove investors to bid up oil prices are ebbing. Tensions over Israel, Lebanon and Nigeria are easing. The hurricane season has presented no threat so far to the Gulf of Mexico. The U.S. peak summer driving season is over, so gasoline demand is falling.
With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies. There's already anecdotal evidence of oil companies chartering tankers to store excess oil.
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All this is turning financial markets increasingly bearish on oil.
"If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil," said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. "I think there is still a lot of risk in the market."
As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59, according to the AAA motor club. In the Seattle area, prices per gallon have fallen to $2.856 currently from $3.071 a month ago, a decline of 7 percent, according to AAA.
Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.
Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.
"The market may test levels here that are too low to be sustained," said Clay Seigle, an analyst at Cambridge Energy Research Associates, a consultancy in Boston.
On Monday, the oil-producing cartel OPEC hinted that if prices fall precipitously, OPEC members would cut production to lift them. But that would take time.
"That takes six to nine months. If we don't have a really cold winter here [creating a demand for oil], prices will fall. Literally, you don't know where the floor is," Verleger said. "In a market like this, if things start falling ... prices could take you back to the 1999 levels. It has nothing to do with production."
Copyright © 2006 The Seattle Times Company
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thegman
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Posted: 09/14/06 - 11:43 Post subject:
As a point of reference, Philip Verleger was a member of the President's Council of Economic Advisors under Jimmy Carter.
One problem with popular energy scenarios is that they are usually one-dimensional. With the price of crude oil, it's often a straight-line extrapolation: Supposedly, the price is headed either straight up or straight down. It doesn't really work that way. The markets may be a lot of things, but they are not linear.
There was a piece in Bloomberg recently about the Peak Oil position called "Peak Oil Forecasters Win Converts on Wall Street to $200 Crude." The title implies that if you believe in Peak Oil, you believe oil is going to $200, or some similar stratospheric price. It also implies that a decline in the price of oil, rather than a rise, would prove Peak Oil to be wrong. The problem is, that type of thinking is too linear. It is single-variable, rather than multiple-variable, and it's garbage analysis.
The only way crude oil sustains $200 a barrel for any length of time is if the dollar gets shredded. Sure, we could see a $200 spike as the result of geopolitical shock, like war with Iran or a terrorist attack, but such a spike would not be sustainable for more than a brief period of time. Sustained $200 crude would be a function of hyperinflation… in which case, gold might be $2,000 an ounce, silver $60 an ounce, corn $10 a bushel, and so forth. It would be a funny-money scenario, not a demand-driven one.
The global economy has limits. Its seams can only take so much strain — $70 oil has been bad enough, requiring huge amounts of credit just to maintain a steady pace. When the global economy sputters, demand for energy at the margins could fall. (That may be, in fact, why prices are falling now.)
But for how long? If a decline in growth cuts the system some slack, a pickup in growth will only pull the line taut again. If growth falls enough to kill off inflation, deflation fears could pop up — in which case, the geniuses at the central banks would roll out the printing presses and boost the price of all commodities in dollar-denominated terms. (Damned fiat currency!!)
It would be nice on the wallet if Verleger's right. However, the problems we face (like M. Ahmadinejad, H. Chavez, F. Excursion) are all still here.
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Pug
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Posted: 09/14/06 - 12:13 Post subject:
Okay...so I didn't really understand all of that (from both the article and G), but what i took from this is that there are multiple factors in the declining and potentially declining cost of oil / gasoline.
But, my question is more for WTR: What do you think the lower price of gasoline would do for a country like China?
Personally, cheaper gasoline for me means that I have more money in my wallet. Not a lot at any given time, but my last fill up was $20 versus $25 a few weeks ago and $28 some time before that. And while I know that there are factors like how much gas I am actually consuming, on average I am spending less and driving somewhat less (actually because I am running less due to injury).
But, I am on a budget for gas+"fun" money, so spending $2 fewer dollars per week means that I have $12 for "fun", which is often eating out or buying some grocery item for the house that we need on a rush and was not on the grocery budget. It'll also save a lot of money on the drive from Minnesota to Orlando, FL in two weeks.
If it is a good thing for me to have cheaper gasoline, than why might it not be a good thing for other nations to have that same opportunity? Is it because "we" don't like their politics and don't want that nation to benefit?
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blue
your favorite weapon
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Posted: 09/14/06 - 13:11 Post subject:
now would a good time to lay some seeds in alternative fuel measures... oil is the gold now, but wouldn't it be something to get in realy early on the next alternative? (ie. the ethanol mixed fuel).
anyway - with India and China needed more oil i get the feeling we're going to see some real bad fights going on in the east as the USA tries to keep the oil it needs.
and lastly - even though i don't understand everything Gman said, he's right that it's not a linear bit. it's a black and white view, and that's lame. life is gray.
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andydp
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Posted: 09/14/06 - 13:58 Post subject:
I have stopped listening to "Oli futures" people after the hearing during the advent/run up to Desert Storm oil prices went up because "Saddam Hussein had a bad dream".
As far as I am concerned, these people are just pulling stuff out of their collective hats. It's a lot like the monkeys selecting stocks based on the "dartboard" scenario.
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wanttorun100
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Posted: 09/15/06 - 09:05 Post subject:
| andydp wrote: | I have stopped listening to "Oli futures" people after the hearing during the advent/run up to Desert Storm oil prices went up because "Saddam Hussein had a bad dream".
As far as I am concerned, these people are just pulling stuff out of their collective hats. It's a lot like the monkeys selecting stocks based on the "dartboard" scenario. |
Yeh - earlier this summer I was sentanced to listen to a bunch of economists talking about energy prices - esp oil and how it would impact my client (they make big yeller tractors and stuff). Near as I could tell they thought $60 is a barrel oil was insane and the company ought not make plans based on that price because it could not be kept at that level.
The interesting thing was how they could make an argument on how a move in either direction in oil prices was good for the company. At that point my head began to swim.
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andydp
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Posted: 09/15/06 - 10:09 Post subject:
| wanttorun100 wrote: | Near as I could tell they thought $60 is a barrel oil was insane and the company ought not make plans based on that price because it could not be kept at that level.
The interesting thing was how they could make an argument on how a move in either direction in oil prices was good for the company. At that point my head began to swim. |
Its amazing how there were dire prediciotn of how the economy would tank at $ 60 bbl oil. We were up to way higher than that ($ 74 ?) and nothing much happened. Oil has dropped to mid 60's and the stock market takes off again.
No one has the crystal ball
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wanttorun100
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Posted: 09/15/06 - 10:27 Post subject:
| andydp wrote: | | wanttorun100 wrote: | Near as I could tell they thought $60 is a barrel oil was insane and the company ought not make plans based on that price because it could not be kept at that level.
The interesting thing was how they could make an argument on how a move in either direction in oil prices was good for the company. At that point my head began to swim. |
Its amazing how there were dire prediciotn of how the economy would tank at $ 60 bbl oil. We were up to way higher than that ($ 74 ?) and nothing much happened. Oil has dropped to mid 60's and the stock market takes off again.
No one has the crystal ball |
true enough - I used to think I wasn't smart enought to follow what they're saying - now I wonder if they just talk in circles
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MechEngDropout
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Posted: 09/15/06 - 16:58 Post subject:
If I was convinced that gas prices were going to go down to 1.15/gal, I'd put everything I had in the stock market and drive around the country in a Ford Excursion.
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GaRebelRunner
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Posted: 09/15/06 - 17:18 Post subject:
The problem with gas prices dropping is Americans will become lazy again rather than working on environmental solutions to oil and other fuel sources. We will continue to be dependent upon other countries/societies for our fuel and making military arrangements to insure our fuel supplies are not in the wrong hands.
Thus, from a purely personal monetary standpoint I'm glad to see the prices falling, I'm not so sure it's in the best interests of our nation or national security in the long term.
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RangerG
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Posted: 09/25/06 - 13:46 Post subject:
I have been in petrochemical refinery business for 25 years. I talk to the refinery folks every day. They are laughing at all the complex and crazy conspiracy and market theories out there...
This is not some complex geopolitical world market voodoo... It has little to do with China or any other nation... Even less to do with oil futures...
Here are the hard and cold facts:
Refineries have a limited number of fuel storage tanks....
What is in them now? GAS!!
What do they want to put in them now? FUEL OIL!!
How do you get rid of something you have too much of, and is not in as much demand as it was a few weeks ago? PUT IT ON SALE!!
This happens EVERY YEAR folks. It is just more noticeable since the price of gas has been so high.
So if you are buying into any other theory, your getting conned by your investment agent, the clueless media or the guy on the next bar stool.
Your Welcome! 
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