It's also interesting that refiners are saying they can get other, cheaper crudes. That and the shape of the futures price curve tells me there's neither a shortage nor a surplus of crude. The huge discount on Arab Heavy (-$13-15 for the US market) tells me that while the US refineries are operating at only 85-88% of capacity, they cannot profitably refine the heavier oils. All the upgrading capacity is full so adding more AH into the mix just means more residual fuels coming out the bottom and less on spec gasoline and low sulfur mid distillates which are where the money is.
This statement also gives me pause:
So not only the Saudis are blowing smoke when they repeatedly announce production increases, but their exports are actually been going down quite significantly lately.
They also export a large amount of finished products (gasoline, diesel, jet, naphtha) and have been moving to become chemicals exporters (plastics etc). Is there really less hydrocarbon going out over the border or have they just moved further up the food chain with their vertical integration? I've no idea what the answer is, but it's a better question than simply focusing on crude oil.
Smells like we have an upgrading shortage, no real crude shortage, and insufficient excess capacity to make financial investors become sellers instead of buyers. Not to mention every time Saudi makes 200 MBD extra available, 100+ is lost in Nigeria or elsewhere to unrest.
Conflating capacity with actual production is a bit unfair.
It seems that the Saudis are implicitly conflating the two. I am not real clear where Jerome has done that. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Even maximal profit is not too important, they may reckon. Gaining certain dominant power will do just fine.
People don't realize just how much money was spent to make Ultra low sulfur diesel. It was huge. Trying to just ram AH into the refining system is just not doable in the modern world where you can't just burn any old shit.
So: still too expensive. In the long run, we're all dead. John Maynard Keynes
Would you install a wind turbine if there was a user who could only profitably buy the power at 2 cts/kwhr? If not, why would you expect the Saudis to price AH at WTI - $30 just so fuel oil could replace nat gas in thermal power plants at the margin and thereby trash the price of the rest of the bbls?
Why would you expect the Saudis to price AH at WTI-$30 just so fuel oil could replace nat gas in thermal power plants at the margin and thereby trash the price of the rest of the bbls?
No idea how those are pricing, but the domestic bbls will be owned by the oil cos who will always use their own bbls first. Gotta put them somewhere. Mexico probably has their Maya sales termed up (sales for a year committed both ways with prices floating off the market). Saudi has customers with contracts but they are more flexible about nominations with reasonable limits. I'm no expert here and it's been a long time since I sat next to the crude traders. Things may be different now.
Smells like we have an upgrading shortage, no real crude shortage,
Ummm....so why do we have crude at this level then?
Just paid a heating oil bill...ouch....!!!! "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
There's a small surplus available, but the Saudis are not going to produce bbls just to sell down the market. Nor are the Iranians. Who would? Everyone else is wide open and stocks are not building
The WTI market is flat to contango (<.8% for 6 months) into winter. That says a well balanced mkt to me.
the market can bid up oil and just hand it off to the ultimate consumer with no risk of loss.
Hang on.
Who is "the market" here?
You are making my point that it is not the consumers but the intermediaries (who are implicitly "the market" you refer to) who are "bidding up" (aka "acceptable manipulation" ?) the market to max out their profits.
I know that's the way that a market run by intermediaries for intermediaries is, but I don't believe - particularly in a Peer to Peer era - it's the way the market needs to be...
It's only a cartel of consumers can fix the problem, of course. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And HiD is saying - as I read him - that while there may be a shortage of sweet crudes (which can be refined profitably), there is no general shortage of crudes.
So why is the crude price this high? Because producers AND intermediaries have an interest in it being "bid up", that's why.
Is it consumers "bidding it up"? You tell me.
If it were the case that the major oil Corporations which produce and refine oil were service providers (getting a proportional fee or service charge) - rather than elements in a supply chain of transactions - then the market would look rather different.
Indeed, I think that the market is trending in the direction of service provision anyway as producers become more and more reluctant to sell "Equity" in their production.
Moreover, the short termism inherent in the financing system has starved the market of necessary investment - particularly in refining, which is where the bottlenecks are.
"Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Even now there are dozens of projects on the books with US refiners struggling to make a profit. Are they obligated to build as much capacity as is required to keep margins at bare minimum so you can have cheap fuel? ho ho ho, pull the other one.
The short termism is that of the financial sector and the levels of returns demanded by the "private" sector for investment.
Refineries, pipelines, storage and other similar infrastructure are essentially utilities, as are airlines in many areas.
If push comes to shove and they all go bust, do you see governments not stepping in? "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
That's a problem with the thinking of some on the left. They believe refiners should just be there to cover their needs without recognizing there's a two way street implicit in that bargain. You can't have cheap and steady.
The price is "offered" by the distributors of refined products.
The distributors buy from refiners (unless they are vertically integrated, but still, if the market price is high enough you may decide to sell your refined products wholesale rather than distribute them yourself). So you can say that there is bidding amond distributors to buy from the refiners.
The refiners bid among themselves for crude. We're told the refiners' high bid for Arab Heavy is lower than Saudi Arabia's asking price. This means that the refiners don't feel they can raise their asking price for refined products, which means that there isn't an unreasonable profit margin being made between refiners and distributors.
So, where are the profit margins? It appears the profit margins are mostly going to the producers.
OPEC can no longer push prices downward by increasing production, but they can push prices higher by withwolding it. They appear to be doing just that with Arab Heavy: asking for a price the refiners won't bear because the market for refined products also won't bear the resulting retail price.
Now, unlike in the 1970's when OPEC's stated reason to withhold production was political (the Yom Kippur war), in this instance the reason is economic. And who can fault them? If they know their balck gold is running out they should husband it, not sell it cheap to Whitey. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
This means that the refiners don't feel they can raise their asking price for refined products, which means that there isn't an unreasonable profit margin being made between refiners and distributors.
Check the development of the shares of the two big refiners Tesoro and Valero. Peak oil is not an energy crisis. It is a liquid fuel crisis.
NYMEX heat July 3.8, Dec 3.95/gallon NYMEX gas July 3.45 Dec 3.3/gallon WTI 136.8 137.1/bbl
Heat cracks are $23/bbl prompt and $29 for winter. That's plenty! gas is lower $8/ $1.5
That's the problem for US refiners designed for max mogas like Valero and Tesoro.
The people at the Preem/Scanraff in Lysekil invested huge $$$ in equipment to turn Russian heavy/sour into sulfur-free diesel. They are swimming in money now. Peak oil is not an energy crisis. It is a liquid fuel crisis.
How much would that cost, how long would it take to build, and what would be its lifetime?
Suppose, also, that you believe in the current price climate a lot of the demand for liquid fuels is going to shift to electricity from other sources on a scale of 5 to 10 years.
It might be that it doesn't make sense to invest in a heavy sour refinery because by the time you'd expect to be recouping your investment, the demand for the refined product just isn't there. We may not be in that situation yet, but it's a scenario I'd like to see developed, because it might mean that the underinvestment in heavy sour refining capacity in the 1980's/90's might be an irreversible, frozen historical accident. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
US refiners still remember a decade+ of pain from the wild eyed expansions of the late 70's/early 80s. Yet there are still billions of dollars of projects in the works. Conoco even has ads on TV bragging about doubling the size of their already large Lake Charles refinery.
I'd guess a modern 250 MBD refinery is at least $5 billion bucks. Would take you 3-5 years from getting permits to go to have it up and running.
while there may be a shortage of sweet crudes (which can be refined profitably), there is no general shortage of crudes. So why is the crude price this high? Because producers AND intermediaries have an interest in it being "bid up", that's why.
while there may be a shortage of sweet crudes (which can be refined profitably), there is no general shortage of crudes.
It might be profitable to refine it if you were willing to pay even more for your heating oil... When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
WHEN DO YOU STOP and stick them with the oil?
Buy an electric heater or a heat pump! That costs even more? Then keep paying whatever they want for the oil. The intermediaries can only sell oil in a circle for so long. At some point a real buyer has to appear to actually use the damn stuff. And they do. And keep paying with only a modicum of whining.
I hear your point and I expect oil will wave down in the next 3-5 years as investment in alternatives and conservation kick in. However, with 1 billion Chinese and another billion Indians still living in 1750 for all intents, there's so much room to grow oil may never really retrace.
agree 100%. Speculation has had input in making the price move much faster to where it was going anyway. Always money to be made in reading the tea leaves and making the market move on YOUR timetable.
But there's no fundamental reason for the price to be higher than $150 - it might stabilize at that level on the argument that at that level alternative energy infrastructure becomes profitable.
2 years abowe $100 and the long-term expectations will set in and change the game. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
In the long run, we're all dead. John Maynard Keynes
For instance, suppose the break-even price is $50, so $80 for 15 years is $30 over break-even for 15 years. Could you get away with $90 over the threshold for 5 years? That would be $140 for 5 years, which you can now perfectly hedge in the forward market. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
And as wind grows, it pulls marginal prices down, thus threatening its own viability. Thus, as I noted before, it's likely that wind will need feed-in tariffs even as fuel prices are very high... In the long run, we're all dead. John Maynard Keynes
You stop when you can no longer afford it, or it becomes "economic" to do something else.
In my case it would be to get the rent reduced (unlikely - but exactly the same dynamics of "rent maximisation" apply), or go and live somewhere else with lower heating costs. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The 'consumers decide the market' bullshit is intellectually offensive. In almost every case that matters, markets are inherently assymetrical. Consumers have a choice to pay, or not pay, but they have no ability to negotiate prices directly, or to push for infrastructure alternatives.
And this is exactly how 'the markets' like it. Real consumer leverage is their worst nightmare, and they'll do almost anything to make sure it doesn't happen.
You could argue that wouldn't make a difference here, because in the case of a demand strike, the producers could always afford to sit it out, because they have an effective monopoly on an essential resource.
Which is true - but since OPEC isn't a monolith, it's hard to imagine that some suppliers might not decide to cut profits in return for sales, and prices would drift downwards.
Almost no product markets are competitive auction markets ... on the one hand, most competitive markets monopolistically competitive fixprice markets, not standardized product competitive flexprice markets ... and on the other hand, the largest value added in the economy is sold into oligopolistic markets.
So if the default was "normal", it would be an oligopolistic fixprice market, and to treat a market as a competitive auction market, you would have to justify that it does, in fact, differ from the norm in those specific ways.
OTOH, with a competitive auction market, Marginal Costs add up to a Supply Curve that is, by virtue of the infinite elasticity of firm demand, independent of market demand ... so you can talk about demand shifts and supply shifts and pretend that they can be independent things, where in 95%+ of all markets in the world, any change in demand elasticity a shift in the traditional Marshallian supply schedule, and a supply shift to a different part of the demand schedule with a different elasticity implies a further shift in supply.
So the default case is what's easiest to talk about with the traditional toolkit, not what's normal. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
the default case is what's easiest to talk about with the traditional toolkit, not what's normal.
the default market in the marginalist economics tradition is the competitive auction market, so a competitive auction market can be assumed by default in a discussion without requiring a defense, but any other market requires defense.
However, this explains why economists attempt to convince politicians to turn everything into competitive auction markets. Energy liberalisation, emissions trading, anyone? When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
The quickest way to half the cost of oil is to use half as much. Lose the big car, insulate your house. Get a heat pump. Car pool.
Of course Joe Blogs can't negotiate with Saudi Aramco, but he can stop feeding demand into the system.
Reminds me of what Mexicans say about cocaine, heroine and marijuana-toking Americans. ... all progress depends on the unreasonable mensch.(apologies to G.B. Shaw)
What are you paying a heating oil bill in June for?
Well, actually it's kerosene, and it's where we get our hot water from. The last 500 litres we had on 20 March cost us £268.29. This lot costs us £332.06 and should last us til September/October.
If this level keeps up, we will definitely have to look at moving, cos 500 litres lasts under a month with the heating running at comfortable levels in our winter - this is a COLD house with thick stone walls which take a lot of warming up. When Solveig moved in about five years ago it was well under £100.00 per 500 litres..
Drew J Jones:
Surely it's not still cold over there.
Well, when I got back to Edinburgh on Saturday it was 9 degrees, pissing it down, and howling through the windows from the East....
Brrr....
It's nicer now, about 16 degrees air temperature, and warm in the sun. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
This lot costs us £332.06 and should last us til September/October.
Holy Jebus. That's about what I spend on all utilities for the whole year. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
And that's without talking about filling the car with petrol.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Edinburgh has an adequate bus system. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
Originally the foam base was put on underneath the stucco because when stucco was used in places where it was not always hot and dry, the stucco would crack from the expansion and contraction.
It was only after doing it that they discovered the side effect in terms of cutting energy bills. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
