How low will it go?

Rob - perhaps the price of oil has declined because demand has declined, not because of speculative activity (or lack thereof)?

When oil spikes up, it takes a little while for a proper response (drivers adjusting habits, governments reducing/eliminating subsidies and so on), and I suspect in the long term, the response will be even stronger (i.e. demand, and prices will fall off much further).

Rimbo, I have a bit of difficulty parsing your comment. Are you saying that traders control the price of oil?

In the very short term, this is true - traders are the first responders to news. But, err, the traders (or speculators, if you prefer), are not the ones consuming oil (or producing it either).*

*OK, some traders are trading on behalf of producers and consumers, but I think Rimbo was ranting against speculators who are NOT producers or consumers.

But of course, the real drivers of oil prices are producers and consumers (consumers including industrial users and so on).

Speculators buy or sell contracts for oil delivery for some point in the future (usually a matter of months, IIUC). These contracts allow the market to quickly react to news and various developments. But unless the speculators have a means to hoard oil (i.e. expensive storage tanks), there is little long-run impact on oil prices. If Israel attacks Iran tomorrow, oil futures will shoot up (as, likely, would spot prices). But this would happen with or without speculators in the marketplace.

As always, you are a font of wisdom.

Fuck it, let them all collapse. I mean those corporate losses aren’t tied to citizens at all, are they? Oh maybe they are

Doing nothing might have cost a lot more. The Fed could have let Bear Stearns careen into bankruptcy, which would have meant that the firm’s lenders and other creditors would have received pennies on the dollar. That’s why a run on Bear already seemed well underway when the Fed stepped in—creditors wanted their money back in full, not in part. And many analysts think a similar run would have materialized at other banks long on risky securities and short on cash.
Another worry is “counterparty risk.” This refers to the way complex financial products peddled by one investment bank are woven into the portfolios of many others, which means that tugging on the fabric—by calling in loans, for instance—can destabilize the whole financial structure. The overall effect on an economy that’s already teetering could have been dramatic. “Without a deal, take everything we’ve seen so far and multiply it by 10,” says Lerner. “If there were a real panic and GDP shrunk by 5 percent, there’d be an immediate real cost to the government in terms of tax revenues—and to all of our prosperity.”

Whether it’s a bailout or not, the Fed’s move benefits taxpayers directly. If you think the housing crunch couldn’t get a whole lot worse, think again. “If the Fed had not stopped this,” says Wachter, “the cost of mortgages would have risen, the values of houses would have declined even more than they already have, and the effect would immediately have hit the pockets of American homeowners.”

And no citizen uses Fannie Mae or Freddie Mac for mortgages anyways.

And as lenders have disappeared from the field, Fannie and Freddie have reassumed their leadership roles. In the second quarter of 2006, Fannie and Freddie accounted for 37.7 percent of mortgage bonds issued, a record low. But in the first quarter of 2008, the two firms accounted for nearly 70 percent of all new mortgages.
Without Fannie and Freddie, in other words, there isn’t much of a private mortgage industry. That is why, despite protestations, Washington’s economic policymakers must be considering ways to deal with the potential failure of these firms. The bonds of Fannie and Freddie can’t be allowed fail. But their stocks sure can.

Who wants to buy a house anyways, or have a guarenteed mortgage?

Fuck it. Let them fall. It only hurts those I-banks and mortgage companies, right?


Why do you hate sluts? They put out!

Maybe if something did fall, the government will actually do something to fix the system instead of just socializing greed.

Do you think I’m arguing in support of subsidising oil? Because that argument doesn’t make a whole lot of sense otherwise. As it happens, I’m absolutely not supporting that idea, I was just arguing against the idea that high oil prices are a Good Thing.

What I’m saying is that the price of oil that you’re hearing about on the news is the price of oil on the futures market.

Now even if you happen to be one of the rare people on the futures market who is actually creating a contract because you actually plan on actually having a barrel of oil to sell or actually having a barrel of oil actually shipped to your actual doorstep, actually,…

Let’s try this again.

Even if you are creating a contract on the futures market with the intend to deliver or receive a barrel of oil, you are either:
[li]buying it at a price that you expect will be lower than its value in two weeks’ time, or
[/li][li]selling it at a price you think will be higher than its value in two weeks’ time.
You’re speculating.

Most people aren’t even doing that; they’re creating the contract and planning on offloading it sometime within the next two weeks; a seller is trying to sell his part of the contract to someone who’ll actu^H^H^H^H have a barrel to sell in two weeks, and a buyer is trying to sell his share to someone who’ll take delivery. And the contract will change hands several times before it act^H^H^H ends up in the hands of two entities who want to move a barrel of oil.

Supply and demand are kinda sorta involved, indirectly. But what’s ac^H^H going to happen is that the folks who bought the oil at $130/barrel are going to have to sell that shit at a loss. And they’re going to lose the shirts off their backs. And it won’t just be the airlines asking for stricter regulation of energy futures at that point; it’ll be the guys whose kids aren’t going to college and whose Bentleys have been repossessed.

Usage demand began to decline before oil hit $80 a barrel.

No, it’s a good thing if you are interested in leaving a better, more sustainable world for your children. An economy based on oil is not sustainable in the long-term (I’m talking 30+ years here) - the sooner we start shifting to other fuels/technologies (many of which still need to be developed) the easier that transition will be. Even if I didn’t give a fuck about the environment, any sane person would be in favor of getting off the oil bandwagon.

So, I’m not in favor of “high oil prices” but I am in favor of oil prices that reflect the future scarcity of oil, which provides market pressure to develop other sources of energy.

Down $3.98 today.

Sure it’s a good thing if all you care about is greener living.

No, it’s a good thing if you are interested in leaving a better, more sustainable world for your children.

I don’t see the contradiction here.

I think moving away from oil is a good idea, I just don’t see extremely high oil prices as a Good Thing because they move the world in this direction. I don’t want to live in a depression-era world even if it means we become greener.

I think his gripe with your phrasing is that it’s not a matter of “living greener,” on par with recycling your milk and soda bottles and making a more conscious effort to turn off lights when you leave the room. It’s progress towards something we have to do; we’re going to be moving away from oil in our lifetimes, mate. We can do it now because oil prices are high enough to make development of alternative fuels economically feasible, or we can do it a few decades from now because the world actually runs the fuck out of oil… some people see the former scenario as preferable.

Really? In the US or the whole world?

It’s not about becoming greener. It’s about switching to a form of energy that isn’t going to run out in the next 50 years (and enabling energy conservation which in the long run leads to a more efficient economy). Could be something dirty like nuclear or coal - it doesn’t have to be a green source.

You can be the most fervent anti-environmentalist, and still see rising gas prices as a good development over the long-term.

In the US. The US is still the largest oil consumer, consuming several times more than 2nd place China. Global demand is slightly up, but supply has outpaced demand the entire time.

Everyone already stockpiled as much as they were going to for the crisis, and now that there is no supply crisis, suddenly there aren’t many buyers for physical barrels of oil. Couple that with a suddenly resurgent dollar (the currency of oil), and you have the free-fall we’ve seen so far. And if I’m correct, we’ll only see occasional blips going back up for a while, like we had on Monday – which my guess would be was due to short covering more than anything.

Saying that paying now for scarcity later is a Good Thing doesn’t make any sense to me. Gradual changes are always better than sudden ones. We can’t build solar power stations overnight. Although somewhat hyperbolic, it’s like saying that the Netherlands getting suddenly swamped with ten meters of sea water now is a good thing, because it will encourage them to build the defences that it will need later in 50 years time. Well, no, because building defences costs money and takes time, and the damage of ten meters of sea water to the country is great.

Here’s the funny:

If this continues for another 2-3 weeks, the government is going to have to be called upon to bail out oil speculators who leveraged themselves 100:1.

This is one of those posts I wish I’d made myself.

Speculators get to fail, because there isn’t much counter party risk there. Sides, people gotta respect the power of the dark si^h^h^h^h^market.

For my part, I can’t seem to grok why people are so down on speculation and short selling. Speculators provide companies with incentives – in this case, to produce more oil, to invest in the production of more oil, and to compete against oil because it’s just so darned expensive and, hey, maybe this algae really can turn into diesel. And short sellers work to keep prices as close to the “fair” value as possible – over value a stock and they do their damnedest to crush it right back down.

These people make the market work, and if it weren’t for them being crazy ballsy with their money most of us would be dreaming of maybe getting a Model T some day.

Rimbo, I don’t understand where you’re coming from. You agree demand went up and supply, at best, stayed constant, so why wouldn’t prices increase?

Subisidizing gas prices is the best recipe for sudden, abrupt and even more harmful change. In fact, arguably, we’ve already shield gas prices for far too long which is why the current prices seem so shocking (in spite of the fact that we still pay far less than most other countries were paying for gas years ago).

It’s not like we pay for scarcity once. We are paying for it all the time. If there was no scarcity of oil it would be free.

What it comes down to is that we won’t do anything at all until we have a reason to. Subsidizing gas for a while is just a way of ignoring the problem for a little longer making the inevitable reaction all the more difficult.

So we had a bit of a gas price scare which fueled some speculation and high prices. People realized for the first time in a while that gas may run out in their life time. To an extent some people have corrected by changing their habits and to some extent the market seems to be correcting for prices that went a little too high a little too quick. However prices aren’t ever going back where they were and will probably continue inching up after they get done jumping around. The country is far more aware of the problem and a lot of people are going to keep their smaller cars or carpools. All in reaction to a natural shift in our economy/society which was a foreseeable outcome of relying on a limited resource.

Now maybe I’m just misunderstanding you but I’m not sure what the heck you think should be happening here to create “gradual” change.