Gas could fall to $2 if Congress acts, analysts say - PhillyBlog

Mars · #1 (**permalink**) 06-25-2008, 01:22 AM

Interesting....if true...

Quote:

Gas could fall to $2 if Congress acts, analysts say

Limiting speculation would push prices to fundamental level, lawmakers told

WASHINGTON (MarketWatch) -- The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets.

Krapels said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets.

"Record oil prices are inflated by speculation and not justified by market fundamentals," according to Gheit. "Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel."

More here:

NHA · #2 (**permalink**) 06-25-2008, 01:46 AM

Quote:

Gas could fall to $2 if Congress acts, analysts say

Limiting speculation would push prices to fundamental level, lawmakers told

WASHINGTON (MarketWatch) -- The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

More here:

George Soros: rocketing oil price is a bubble

Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

"You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand.

"The rise in the price of oil and food is going to weigh and aggravate the recession."
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union · #3 (**permalink**) 06-25-2008, 10:41 AM

Should they also limit speculation in pork bellies or frozen concentrated orange juice? It is a free market society...

Ezra · #4 (**permalink**) 07-23-2008, 08:39 AM

Why do you want gas prices to drop? Do you want to kill people!!??

http://www.foxnews.com/story/0,2933,389082,00.html

COLUMBUS, Ohio — Nationwide figures show that traffic deaths are
dropping as gas prices climb.

The National Safety Council reports a 9-percent drop in motor vehicle
deaths through May, compared with the same time period last year.
Researchers say that includes an 18-percent drop in March and 14
percent in April.

Preliminary figures obtained by The Associated Press show some states
reporting 20-percent declines in traffic deaths — or more.

No one is saying for certain why road fatalities are decreasing, but
the drop comes as Americans cut back sharply on driving because of
record-high gas prices.

The last time road deaths fell this quickly and this sharply was more
than 30 years ago: during the Arab oil embargo of 1973-1974. After
states raised the drinking age to 21 from 1982-1983, traffic
fatalities fell 11 percent.

Hillerman · #5 (**permalink**) 07-23-2008, 08:55 AM

NPR's On the Media had an interesting report about how the whole thing with the oil companies and supply and demand is being misreported.

Here is the most relevant and important bit:

HOWELL RAINES: The oil companies have gotten away with a very simplistic explanation, that this is purely supply and demand. And they cast themselves as helpless victims of supply and demand.

We have a supply crunch because of a calculated decision on their part to 1) cut back on exploration, 2) close half of the refineries that we had only a few years ago, and 3) to redirect all of their spending from things like research and development into profits. So, none of these things are unpredictable or accidental.

So why are the gas prices so high?
It is because the oil companies are profiteers.
Of course the politicians in their pockets aren't going to do anything about it and the media is getting played by the oil company spin.

GMonkey · #6 (**permalink**) 07-23-2008, 09:13 AM

The gas crunch is making life difficult for so many people. On the other hand, we would never have had this big of a rush for car companies and consumers to seek alternate energy, alternate transportation, and fuel efficient vehicles if gas were not expensive.

If we survive this, we'll be better because of it.

I really feel for people who can't live near work because they are priced out of the neighborhood, and have no public transportation options.

MayfairMeat · #7 (**permalink**) 07-23-2008, 09:18 AM

The % of people who are driving on the roads who have car insurance is actually going up... because a lot of those who weren't insuring their cars have finally left them in the garage.

PhillyRunner · #8 (**permalink**) 07-23-2008, 10:25 AM

Quote:

Originally Posted by Hillerman

NPR's On the Media had an interesting report about how the whole thing with the oil companies and supply and demand is being misreported.

And how does Howell Raines know all of this? Do you or he have any data to support these assertions?

Quote:

We have a supply crunch because of a calculated decision on their part to 1) cut back on exploration, 2) close half of the refineries that we had only a few years ago, and 3) to redirect all of their spending from things like research and development into profits. So, none of these things are unpredictable or accidental.

With regard to item 1, this is simply wrong. If you look at the audited financial statements of most every major integrated oil & gas company, you will see that, over the past 5-7 years, their exploration expenditures have grown significantly. Moreover, given the high price of oil, the companies want to find more so that they can sell it at relatively high prices. The oil companies would love to continue exploring, especially in ANWR, and off the continental shelf. I'm all for it. How about you?

With regard to item 2, the last refinery built in the U.S. was completed in 1975 (I think). That's partly the result of regulation and partly the result of land acquisition costs. As a result, many of our refineries are old and in significant need of maintenance, which means it's more difficult for them to operate at capacity (or, in some cases, at all). Again, with gasoline prices being what they are, refineries would love to operate at greater capacity than they currently do to take advantage of the current prices.

With regard to item 3, we already discussed exploration costs in item 1, which constitutes the bulk of the capital investments by oil companies, so there's not too much else to add.

With regard to placing blame on speculators for oil prices, I commend you to this surprisingly insightful article from the New Yorker.

Quote:

Futures contracts can be used by oil sellers (like OPEC ) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price. Speculators, by contrast, mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil. These gambles can be tremendously lucrative, but they don’t directly determine the real (or “spot”) price of oil. That’s set by the people who are buying and selling actual barrels of petroleum. Although speculators could directly distort oil prices by turning their futures contracts into oil and then taking it off the market to drive up prices, a look at oil inventories shows no sign that this is happening.

Of course, the Economist always has an interesting take on things.

Quote:

This reasoning holds obvious appeal for those looking for a scapegoat. But there is little evidence to support it. For one thing, the surge in investment in oil futures is not that large relative to the global trade in oil. Barclays Capital, an investment bank, calculates that “index funds”, which have especially exercised the politicians because they always bet on rising prices, account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption.
More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.

Even Newsweek (albeit through one of their more sensible writers) sees the folly in this argument.

Quote:

These extra funds might drive up prices if they were invested in stocks or real estate. But commodity investing is different. Investors generally don't buy the physical goods, whether oil or corn. Instead, they trade "futures contracts," which are bets on future prices in, say, six months. For every trader betting on higher prices, another is betting on lower. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market and all can lose in a falling market. In futures markets, one trader's gain is another's loss.
Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in a selling price for their grain by selling grain futures. What makes the futures markets work is the large number of purely financial players—"speculators" just in it for the money—who often take the other side of hedgers' trades. But all the frantic trading doesn't directly affect the physical supplies of raw materials. In theory, high futures prices might reduce physical supplies if they inspired hoarding. Commercial inventories would rise. The evidence today contradicts that; inventories are generally low. World wheat stocks, compared with consumption, are near historic lows.

And Sebastian Mallaby gets it, too.

Quote:

The most basic problem with this claim is that a speculator can buy paper oil only if someone else sells to him. For every trader who bets on a price rise, there must be another who bets the opposite. So an increase in the number of speculative players does not show whether prices will move up or down. Think of a youth soccer team: If it adds two extra players it doesn't become more likely to win, because its opponents will add two players as well.

But if it's easier to believe that there is some vast oil-wing conspiracy out to screw us all, who am I to stop you?

Malloy · #9 (**permalink**) 07-23-2008, 10:37 AM

An ExxonMobil executive told my boss that there are 12 refineries being built right now...and they will be online in a few years. (2 will be in the US) Once they come online, we will see prices drop. I hope this is good info.

Quote:

Originally Posted by PhillyRunner

And how does Howell Raines know all of this? Do you or he have any data to support these assertions?

With regard to item 1, this is simply wrong. If you look at the audited financial statements of most every major integrated oil & gas company, you will see that, over the past 5-7 years, their exploration expenditures have grown significantly. Moreover, given the high price of oil, the companies want to find more so that they can sell it at relatively high prices. The oil companies would love to continue exploring, especially in ANWR, and off the continental shelf. I'm all for it. How about you?

With regard to item 2, the last refinery built in the U.S. was completed in 1975 (I think). That's partly the result of regulation and partly the result of land acquisition costs. As a result, many of our refineries are old and in significant need of maintenance, which means it's more difficult for them to operate at capacity (or, in some cases, at all). Again, with gasoline prices being what they are, refineries would love to operate at greater capacity than they currently do to take advantage of the current prices.

With regard to item 3, we already discussed exploration costs in item 1, which constitutes the bulk of the capital investments by oil companies, so there's not too much else to add.

With regard to placing blame on speculators for oil prices, I commend you to this surprisingly insightful article from the New Yorker.

Of course, the Economist always has an interesting take on things.

Even Newsweek (albeit through one of their more sensible writers) sees the folly in this argument.

And Sebastian Mallaby gets it, too.

But if it's easier to believe that there is some vast oil-wing conspiracy out to screw us all, who am I to stop you?

PhillyRunner · #10 (**permalink**) 07-23-2008, 10:51 AM

Quote:

Originally Posted by Malloy

An ExxonMobil executive told my boss that there are 12 refineries being built right now...and they will be online in a few years. (2 will be in the US) Once they come online, we will see prices drop. I hope this is good info.

There's one in Wyoming. Where's the other?

I don't imagine that the foreign-built refineries will much help domestic gasoline prices, as they will likely serve to fill demand in foreign markets, thereby keeping upward pressure on the price of crude oil and not doing much to alleviate demand, either here or abroad.

Of course, if oil companies are making maximum profits by idling their refineries, query why they are building more? (Not directed at you, Malloy.)