[Gizmag] Breakthrough promises $1.50/ gallon synthetic gasoline.

[Mr. Wyndham]

Originally Posted by fielderLS3

I'm quite confident that prices will come crashing down again at some point. I only worry how high it will go in the mean time. Then, we can repeat the cycle again in another few years.

You're right, it is a 'game.' One that must be driving product planners at the auto companies crazy.

It encourages a "diverse product portfolio", that's for sure...otherwise, I'm not certain we'd be able to see a Chevrolet with a Volt on one end, a Corvette on the other...and every manner of other car and truck in between.....

[a_Username]

Originally Posted by DGthe3

I never said the corporations were arbitrarily raising their prices, or even attempted to imply it. They simply take advantage of favourable market prices.

The price of oil is determined by the market, but not the market of buyers. Oil contracts are traded on futures exchanges mainly by speculators, who have a whole host of concerns beyond how much oil there is, and how much is being used. And they don't actually take delivery of any oil. Speculators even caused the price of oil to triple in a year and a half (early 2007 to mid 2008) for no good reason. No major global events and while demand was creeping up it wasn't skyrocketing (and supply was more or less keeping pace). Yet in that time, oil went from ~$50/barrel to ~$150, for reasons known only unto them.

I'll forward it. Buts not all that troubling

Originally Posted by DGthe3

By mark up, do you mean above and beyond a 'reasonable' proffit? If so, you're mistaken. Profit margins at the pump are usually fairly thin. The insane profits that get reported are based off of selling an enormous volume.

They make a good deal of their money based on the price of oil as a commodity. As I understand, oil gets sold at market value, not production cost + X profit. So if crude futures are trading at double or tripple the extraction cost, profits go way up for anyone extracting oil. If, for some bizarre reason, the market dictates that crude should be sold at $5/barrel (far less than the extraction cost) ... all the oil companies would be in serious trouble.

The first bold is, as I have no idea how else to put it lightly, completely ignorant of capitalism. For any good (including labor), its price is determined by supply and demand. Supply is for the most part determined by production; demand is determined by the wants of different consumers. Ultimately, the consumer is the one who is in control of the allocation of resources. Also, the sentence following the first bolded sentence is very curious to me. You later state that speculators are the main reason for the increase/decrease of the price of oil per barrel, but you state that they do not "arbitrarily raise prices." The following person explains it better than me...

To explain a price increase, we need an increase in demand, a decrease in supply, or both. Supply has recently been hit by hurricanes and other interruptions. Demand increases have thus generated larger price increases than would otherwise have been the case. On the demand side, there are many indications that part of the increase has been driven by speculation. Speculators include motorists who fill up more frequently, home owners who order earlier their winter supply of heating oil, and refiners, distributors and other intermediaries who try to buy when it costs less. Professional speculators merely try to anticipate future demand, which depends on the subjective preferences of consumers.

Of course, all speculators render a useful service by conveying the market’s evaluation of scarcity. Their activity also evens out price movements over time: in the case of oil, they buy now, when prices are lower (in their expectations), in order to sell later, which will bring future prices down. As usual, greed is useful. To repeat what two Cato economists wrote about the oil industry, let’m gouge!

The second bold is contradictory. Their production costs and desire to maximize profits influences supply which in turn influences prices.

Originally Posted by fielderLS3

"Speculation" is determining prices, not production and consumption. Oil and gas inventories are at record highs, but still, Wall Street investors own 4 to 5 times more oil on paper than there actually is in storage. It is a bubble doomed to burst eventually, just like in 2008. The only question is, how high first?

My reply to DG would suffice here. Speculation takes place in every industry, every day, and every hour. It's nothing more than a misunderstood term that is thrown out by political officials to place blame on anything but themselves. Another point that both of you overlook is you're looking at oil prices in the nominal. The price of oil, as the graph I've sent to both Dragoneye and DG would support, shows how the real prices of oil would remain stable (most likely decreased over time) if not for government interference. Real prices are the ones that mainly matter to economists, considering they take into account the inflation rate and the predicted inflation rates for future products. The boom-bust or business cycle isn't an inherent instability of the market economy; this idea was put to rest (for the ones who have been predicting crash after crash) by the Austrians in the '30s.

[DGthe3]

Originally Posted by a_Username

The first bold is, as I have no idea how else to put it lightly, completely ignorant of capitalism. For any good (including labor), its price is determined by supply and demand. Supply is for the most part determined by production; demand is determined by the wants of different consumers. Ultimately, the consumer is the one who is in control of the allocation of resources. Also, the sentence following the first bolded sentence is very curious to me. You later state that speculators are the main reason for the increase/decrease of the price of oil per barrel, but you state that they do not "arbitrarily raise prices." The following person explains it better than me...



The second bold is contradictory. Their production costs and desire to maximize profits influences supply which in turn influences prices.



My reply to DG would suffice here. Speculation takes place in every industry, every day, and every hour. It's nothing more than a misunderstood term that is thrown out by political officials to place blame on anything but themselves. Another point that both of you overlook is you're looking at oil prices in the nominal. The price of oil, as the graph I've sent to both Dragoneye and DG would support, shows how the real prices of oil would remain stable (most likely decreased over time) if not for government interference. Real prices are the ones that mainly matter to economists, considering they take into account the inflation rate and the predicted inflation rates for future products. The boom-bust or business cycle isn't an inherent instability of the market economy; this idea was put to rest (for the ones who have been predicting crash after crash) by the Austrians in the '30s.

Your government "interference" is a horrendous use of the term, as it implies an active intent to control the price, and not global geo-political events

As for oil being determined by supply and demand, please use that to explain the meteoric rise in 2007-2008, and then the even faster decline in the fall of 2008.

[a_Username]

Originally Posted by DGthe3

Your government "interference" is a horrendous use of the term, as it implies an active intent to control the price, and not global geo-political events

Active intent? Of course it is. Regulations, import/export quotas, etc. have that exact intent of controlling prices. The OPEC cartel, for example, cuts production or willingness to trade to imported-oil dependent nations.

As for oil being determined by supply and demand, please use that to explain the meteoric rise in 2007-2008, and then the even faster decline in the fall of 2008.

I already have, considering every good's price is determined by supply and demand. Supply is just a broad term that includes production and anticipation of the future by business owners. Demand is another broad term that includes factors like changing consumer preferences and anticipation of the future as well. These owners may increase supply if they anticipate that demand will remain stable or grow. Or, as happened in 2007-2008, the Fed increased then decreased the money supply (causing an inflationary effect), taxes were increased on oil, and production was cut in response from changing expectations. After all of this, demand for oil changed causing people to become "hoarders." This also pushes prices up due to the local market's inability to satisfy this increased demand. The fall can be attributed to the new equilibrium of supply/demand creating a surplus of oil, which causes prices to fall.

Basically, the supply was distorted by numerous government failures and unnecessary interventions with changing expectations and production techniques of business owners to reflect these failures, while demand was increased due to simple fear of rising prices by consumers. BTW, it's weird that its the speculator's fault now, while they were still going strong when times were good.

(Also, this depends on what currency you measure economic output in).

[usa1camaro1969]

Originally Posted by viper1cobra

Its $3.96/Gallon Here.

What part of Texas are you in? In central Texas regular is $2.87, mid is $3.03

[DGthe3]

Originally Posted by a_Username

Active intent? Of course it is. Regulations, import/export quotas, etc. have that exact intent of controlling prices. The OPEC cartel, for example, cuts production or willingness to trade to imported-oil dependent nations.

Sure, OPEC does all that. But the price of oil doesn't automatically go up when they cut production, or down when they increase supply. Sometimes it does, sometimes it doesn't. And often when they do that, its a reaction to what the price of oil is already doing, not the initiator. Plus, OPEC doesn't always react to geopolitical events.

Originally Posted by a_Username

I already have, considering every good's price is determined by supply and demand. Supply is just a broad term that includes production and anticipation of the future by business owners. Demand is another broad term that includes factors like changing consumer preferences and anticipation of the future as well. These owners may increase supply if they anticipate that demand will remain stable or grow. Or, as happened in 2007-2008, the Fed increased then decreased the money supply (causing an inflationary effect), taxes were increased on oil, and production was cut in response from changing expectations. After all of this, demand for oil changed causing people to become "hoarders." This also pushes prices up due to the local market's inability to satisfy this increased demand. The fall can be attributed to the new equilibrium of supply/demand creating a surplus of oil, which causes prices to fall.

Basically, the supply was distorted by numerous government failures and unnecessary interventions with changing expectations and production techniques of business owners to reflect these failures, while demand was increased due to simple fear of rising prices by consumers. BTW, it's weird that its the speculator's fault now, while they were still going strong when times were good.

(Also, this depends on what currency you measure economic output in).

I get it ... when you estimate the future supply/demand of a commodity such as oil, and use that to determine the value of a commodity, its not futures speculation. Because I thought that was exactly what futures speculation was all about.

[a_Username]

Originally Posted by DGthe3

Sure, OPEC does all that. But the price of oil doesn't automatically go up when they cut production, or down when they increase supply. Sometimes it does, sometimes it doesn't. And often when they do that, its a reaction to what the price of oil is already doing, not the initiator. Plus, OPEC doesn't always react to geopolitical events.

I get it ... when you estimate the future supply/demand of a commodity such as oil, and use that to determine the value of a commodity, its not futures speculation. Because I thought that was exactly what futures speculation was all about.

No it does not happen immediately, considering supply and demand has to reach a new equilibrium price. Couple this with the fact you're talking about a global economy, then it could take weeks for the price to show. Then again, the prices we see are also influenced by a variety of other factors. You have regulations, quotas, inflation, etc. that all distort the price mechanism. The OPEC reacts to political events when it involves a member country; name one time that it hasn't. It is responsible for the dramatic change in oil prices, but it is not always responsible for the reason of change. I.e., it is not always an OPEC country that starts the chain of government failures, such as failures in diplomacy or policies.