Oil Drops over 30% since summer, now what?

[300UGUY]

The US "could" set a floor price that would ensure continued domestic production. Place a tariff on all imports to keep the field level.

My problem with this is ... I don't trust the government to establish the floor price.

The advantage would be, we would strengthen the domestic industry, create jobs, stabilize prices and remove the threat of being held hostage by a bunch of middle eastern &*&^%&s.

That would never fly with the right wing free market guys, they call that protectionism. Not saying I disagree with you. But everybody else would want their piece of protection.

 

[KiotiKowboy]

That would never fly with the right wing free market guys, they call that protectionism. Not saying I disagree with you. But everybody else would want their piece of protection.

That's interesting since I'm pretty far right myself. This issue comes down to sustainable domestic production of oil. It's good for the economy and it's critical for our national security.

Don't read my willingness to use tariffs as something I would propose as a tool to support maintaining union wages. That's an entirely different question.

 

[SPIKER]

What many probably do not know is how those wells producing all the oil in TX up thru Dakotas even into Canada is NOT receiving the big $ that everyone thinks. Those wells produce oil at a price at the well head in the $50 buck range (to producer of oil) since November. Here recently producers are seeing less than 50 per BBL for oil in the Dakotas (those who think that the land owner gets $67 at today's price don't know the underlying commodities intricacies.)

Sub-$50 Oil Surfaces in North Dakota Amid Regional Discounts - Yahoo Finance

A large part of the price difference is the transportation costs (reason KeystoneXL is still needed long term) as trains are full of oil. This also creates issues for farmers trying to send grains to market (no train space.)

Then we still have diesel here at 3.75 per gallon which I dont understand and still holding off filling up the tanks...


Mark

 

[Leejohn]

It's the black market oil that has dropped price.

 

[KiotiKowboy]

This also creates issues for farmers trying to send grains to market (no train space.)

Which "could" lead to investment/expansion of railroads!

 

[MinnesotaEric]

Back in 2011, I noted that fuel and oil is priced in dollars. Whether or not a country is Dutch, Arab, Asian or whatever, fuel and oil is priced in dollars on the global market. Demand for energy like fuel and oil in emerging countries continues to increase. As a result and as every high schooler can tell us, when supply is constrained but demand increases, we will then see price increase because of the law of supply and demand.

Hold that thought in mind but set the law of supply and demand aside for now. Because to explain the energy story I need to explain something that is not taught in schools, namely that the trajectory of markets is largely set by bond pricing which in turn effects the value of currency which is what energy is priced in. Stick with me because I'm diving into the deep end:

1) Interest rates are a way of measuring the demand for money.

• Low interest rates mean demand for money is low and demand for debt is high.
• High interest rates mean that demand for money is high and demand for debt is low. For example: If my demand for your debt is low, you will need to pay me more to hold your debt in the form of higher interest rates. And why would you be willing to do so? Because demand for my money is high.

Hence,

High interest rates mean that demand for money is high and demand for debt is low.​

In other words, raising interest rates means that a currency is becoming more valuable and falling interest rates mean that a currency is becoming less valuable.

2) Devaluing a currency makes domestic goods and services produced or offered less expensive relative to other currencies.

• We know a currency is devaluing when interest rates trend downward.
• When currency is cheap relative to foreign currencies, our local economy tends to strengthen on increased exports and bolster domestic employment.

In other words, during periods of economic weakness, a central bank will try to devalue its currency as a way to increase employment and increase domestic commerce.

3) When interest rates are zero, central bankers have few tools to effectively lower interest rates.

• They can print money. Printing money can be literal printing of money which isn稚 very effective because less than 5% of our currency is in paper form.
• They can lower the reserve capital requirements of banks, thereby multiplying the money supply available for lending.
• Or they can devalue to money by purchasing debt in the currency they issue thereby effectively diluting money.

Those central banks that have the ability to do so have all sought to devalue their currency. But devaluation is relative and as one central bank devalued its currency, that provided motivation for another central bank to devalue its own currency. This has resulted in increased costs of commodities which are often priced in dollars. But the increased price in commodities isn't true inflation because peoples incomes have not inflated. As a result, when commodity prices increased, there is demand destruction and commodities pricing can be expected to fall unless demand remains elevated. Central bankers realize this and for this reason they have not yet grown concerned about the increase in commodity pricing because they expect demand destruction.

The only thing that actually drives sustained commodity price increases is continuous population growth. Continuous population growth drives underlying demand. Thus the wise look at demographics in order to predict future demand.

 

[dirt ditch]

 

[charlz]

Then we still have diesel here at 3.75 per gallon which I dont understand and still holding off filling up the tanks...
Mark

Well it is heating oil season so there is more demand for that type of fuel. I did see some notes that refineries are coming out of maintenance and back into production so we may see an increase in production of heating oil/diesel for the heating season. Whether it will be enough to bring diesel prices down will have to be seen.

 

[NoTrespassing]

Back in 2011, I noted that fuel and oil is priced in dollars. Whether or not a country is Dutch, Arab, Asian or whatever, fuel and oil is priced in dollars on the global market. Demand for energy like fuel and oil in emerging countries continues to increase. As a result and as every high schooler can tell us, when supply is constrained but demand increases, we will then see price increase because of the law of supply and demand.

Hold that thought in mind but set the law of supply and demand aside for now. Because to explain the energy story I need to explain something that is not taught in schools, namely that the trajectory of markets is largely set by bond pricing which in turn effects the value of currency which is what energy is priced in. Stick with me because I'm diving into the deep end:

1) Interest rates are a way of measuring the demand for money.

• Low interest rates mean demand for money is low and demand for debt is high.
• High interest rates mean that demand for money is high and demand for debt is low. For example: If my demand for your debt is low, you will need to pay me more to hold your debt in the form of higher interest rates. And why would you be willing to do so? Because demand for my money is high.

Hence,

High interest rates mean that demand for money is high and demand for debt is low.​

In other words, raising interest rates means that a currency is becoming more valuable and falling interest rates mean that a currency is becoming less valuable.

2) Devaluing a currency makes domestic goods and services produced or offered less expensive relative to other currencies.

• We know a currency is devaluing when interest rates trend downward.
• When currency is cheap relative to foreign currencies, our local economy tends to strengthen on increased exports and bolster domestic employment.

In other words, during periods of economic weakness, a central bank will try to devalue its currency as a way to increase employment and increase domestic commerce.

3) When interest rates are zero, central bankers have few tools to effectively lower interest rates.

• They can print money. Printing money can be literal printing of money which isn稚 very effective because less than 5% of our currency is in paper form.
• They can lower the reserve capital requirements of banks, thereby multiplying the money supply available for lending.
• Or they can devalue to money by purchasing debt in the currency they issue thereby effectively diluting money.

Those central banks that have the ability to do so have all sought to devalue their currency. But devaluation is relative and as one central bank devalued its currency, that provided motivation for another central bank to devalue its own currency. This has resulted in increased costs of commodities which are often priced in dollars. But the increased price in commodities isn't true inflation because peoples incomes have not inflated. As a result, when commodity prices increased, there is demand destruction and commodities pricing can be expected to fall unless demand remains elevated. Central bankers realize this and for this reason they have not yet grown concerned about the increase in commodity pricing because they expect demand destruction.

The only thing that actually drives sustained commodity price increases is continuous population growth. Continuous population growth drives underlying demand. Thus the wise look at demographics in order to predict future demand.

Commodities Retreat to Five-Year Low as Oil Tumbles With Bullion

Commodities Retreat to Five-Year Low as Oil Tumbles With Bullion - Yahoo Finance


I like your explanation and now that oil is at a 5 year low, do you have a prediction of where the bottom is and how long it will stay there? Then, can you tell me how you would make money on this drop if you have some cash laying around making almost no interest?

Kevin

 

[tallyho8]

The US "could" set a floor price that would ensure continued domestic production. Place a tariff on all imports to keep the field level.

My problem with this is ... I don't trust the government to establish the floor price.

The advantage would be, we would strengthen the domestic industry, create jobs, stabilize prices and remove the threat of being held hostage by a bunch of middle eastern &*&^%&s.

The problem with this is that other countries do not just sit idly by when we put tariffs on their products. They respond by putting tariffs on our products.

This decreases our exports. weakens our domestic industry, creates a loss in jobs and causes more tension between the countries.

Remember Newton's law, there is no action without an equal and opposite reaction.