Oil illusions and/or delusions

(Part 1 of 2)
I posted a piece on the current oil price decline. I could be wrong on my interpretation. Now that I think more about it, I just don’t know.

There are many different angles and factors in the issue. I decided to list some of the variables in an attempt to put the pieces on the table to get a full view, not to prove one view or another. I just thought it would be interesting to see the components.

Basically there is a view catching wide reporting that the decline in prices have hurt the domestic oil industry, and in particular Texas. Some reports describe it as a Saudi war on Texas. The narrative is that Saudis are flooding the market with oil with the intent to hurt our production, namely shale and fracking businesses, which are more cost intensive than cheaper Saudi oil.

A lot of people believe that and follow that line of reasoning. I’m not so sure. I wrote the previous piece off the cuff in reaction to a couple reports I saw getting widely spread. A few days later and I see more reports from economists with the same perspective. It has me wondering am I the lone person who questions that? Did I miss something or am I making a mistake, as sometimes happens? Am I too quick to jump to conclusions or is my bias getting in the way? There can be different opinions.

By nature some reports are kind of hard to understand and complicated anyway. But then I am no economist, and many of these people are degreed academics. I generally have some healthy skepticism and especially when I see piling on a theme. In the end, maybe there is no correct view, and maybe it cannot be seen in just one way.

Supply and demand. This is the talking point that we have heard most in the last 6 or so years. They claim it is market forces driving the high consumer prices we have seen, and actually come to accept as the new normal. This explanation is so institutionalized that we had countless investigations on higher oil prices only to be told it is just supply and demand. Those investigations don’t reveal any gimmickry, so we’re told, and no market manipulation. In fact, reports are no one can manipulate the industry. The very idea would be absurd.

There are investors and traders and hedge funds, oh my. We hear they are the ones to blame for prices. They call them speculators. They bid the prices up to higher levels. There is an awful lot of trading going on.

Cheap oil flooding the market. In the latest analysis the Saudis are leveraging their low cost oil by flooding the market in an attempt to lower costs, making higher cost production less profitable, if at all. This will stop the investment in these processes and stop the industry in its tracks. This is the point of the current reports.

Consumer demand. We will buy something at a marketable price. But in theory the higher the price is the less you will buy, or the less you want to buy it. As prices moderate or come down, you sell more of it. So even in a down economy people will buy just what is necessary, sometimes taking from other expenses. Especially at rising, or higher prices, other goods are affected because they have less money to spend. So people cut back in discretionary spending or luxury areas to offset the higher prices at the pump. Plus they cut use of the product in any ways they can. But other areas of the economy have to be affected because a bigger chunk of the money is going to a particular necessity. For instance less for clothes, food, and less disposable income.

Subsidized economies. Some countries subsidize certain areas of the economy. Many oil rich countries have lower consumer prices due to government subsidies. Some governments own or control the resources and depend on those resources for revenue to fund their government.They make budgets and decisions based on price projections.

Taxes. the money paid to gov’t on refined goods. Higher prices bring higher taxes.

OPEC, a group of oil rich nations allying to make adjustments en masse on production etc.They meet frequently to discuss their issues and concerns. (That I compare them to the Genovese crime family is neither here nor there — they are what they are) They can move or function as a bloc. They have a union concept working for them.

Oil companies, international or domestic, that produce and explore for resources. (Or if you are a card carrying leftist, the bad guys) Private companies in this country making decisions based on a bottom line profit margin, which employ many people. They are involved in production, transportation, refining, storage etc.

Government, involved in regulating, making regulation, protecting resources and assets. Also dispenses permits and approvals, and has oversight capability. It also collects revenues on the business models, as well as on consumer goods, such as refined products.

Retail businesses: Stores that sell finished goods directly to the public consumers.

Fracking and shale oil newer and higher cost drilling operations.

Cost – benefit analysis study of the benefits derived from the cost of materials and production, and projections or decisions based on those factors.

Industry and bulk users corporations and industry that use a particular commodity as basic in their business models. Airlines, freight, energy companies.

Speculators or investors and put hedge funds in this bracket. People or companies investing in oil based on its price fluctuation or performance over a period of time. People buying futures as in any other market, who hope to make a profit. (Such as Hilary’s pork belly futures)

Now, the idea is not to make some grand conclusion by these factors. Just say these are some relevant tangents in the overall picture.

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