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#19893 - 05/02/06 01:23 AM Re: The Proposed $100 Gas Rebate [Re: Mike Rawdon]
intrepid02 Offline
Snarky Bastard

Registered: 06/24/02
Posts: 1421
Loc: Boulder
If I was making $24k/hr I think I'd have a LOT of trouble finding the motivation to work more than 8 hours... a year!

Think about it. Who makes $192k in a day and then goes back to work the next day? I think most of us would be a on a killer road trip.

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#19894 - 05/02/06 03:19 AM Re: The Proposed $100 Gas Rebate [Re: Daniel]
ScottR Offline
journeyman

Registered: 05/27/05
Posts: 99
Thus while most oil flows under contract, its price varies with spot markets.

Hey Smike, doesn't it just suck when you hand someone the bat to beat your side of an argument into the ground ?

BTW most independent producers I know get a monthly average + or - a quality spread, and every single one of them is fracing their stripper wells.

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#19895 - 05/02/06 11:44 AM Re: The Proposed $100 Gas Rebate [Re: ScottR]
crackers Offline
Carpal Tunnel

Registered: 03/21/01
Posts: 3424
Loc: pdx
Actually, almost all production companies are in contracts that are either a monthly running average of WTI cushing spot, or a ten day lookback of implied spot off of the nymex crude curve, with adjustments for the sulpher content et al.

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#19896 - 05/02/06 12:13 PM Re: The Proposed $100 Gas Rebate [Re: Daniel]
crackers Offline
Carpal Tunnel

Registered: 03/21/01
Posts: 3424
Loc: pdx

Which is why we shouldn't subsidize it, right? If it's profitable to make it, then the companies will do it. If it's not profitable to make it, why should we pay for them to do it?

And what public policy reason would justify buying more expensive domestic oil when cheaper foreign oil is available? And isn't all oil fungible anyway? If we needlessly buy more expensive domestic oil for the reserve, wouldn't that decrease demand for imported oil and cause the price to be even lower?


In no particular order.

Oil is fungible when it's a openly traded commodity. When you're at war and the straits of Hormuz are closed and the Saudi fields are on fire, well, then, who gives a rats ass about that scheduled delivery from Qatar? This is the main reason why we have the strategic reserve and why the US government will subsidize oil production in the USA until our jets and tanks and everything else uses power sources other than crude oil in its disparate refined forms. We should pay them to make oil as long as our military needs oil to operate. We shouldn't necessarily allow new drilling, but we should be producing oil.

I might be off, but according to last weeks economist, the daily purchases for the strategic reserve are in the neighborhood of 30,000 barrels...which of course is really big in comparison to the 10+ million barrels used daily in the USA.


But does Chevron still get to pocket at least some portion of the difference when the price goes up?


Absolutely, it's just not as much as one might think; and they pay taxes twice on it. The people making out like bandits are the oil producers. They get paid once for the right to take the oil out of the ground and second for the export duties. You can expect to see a lot more arab oil money. A reasonable estimate is something like this: it cost $0.35 to get the oil out of the ground, of which $0.20 was recovered from the US gov't in the form of MACRS (see scott's comment above). It's light sweet crude and the current OPEC basket is about $52 in the lookback period so the payment to the local dictator is $0.45 per gallon, and the export duty is $0.20, and then they pay the US govt $0.0525 to $0.21 per barrel (btw, the import tariff for motor oil aka gasoline is %0.52 to $1.02; wonder why we don't import more gasoline?)...Everything in the chain except the import tariff fluctuates with the market price of oil. So yes, they make a killing, but it's not exactly the bloody murder killing you'd think it was: it's only half or so...

One interesting thing is that the only major oil company in the world--btw, when i say big five or six, i'm talking about world players not american--to have concentrated on production and refineries for the past ten years has been Exxon. Everybody else is playing acquisition or get out of gas. That's primarily why Exxon has had such strong numbers, and why the board decided to reward the retired CEO: he made the right bet. In terms of the company, you can even see why they thought $400 mm was fair. His bonus represents less than $0.001 per share outstanding. Since 1990, the company has appreciated from $20 per share to about $60. In my eyes, that return is certainly worth $0.50 of my money: although I must say its vulgar and I don't really believe in compensation packages so large that they corrupt.

I think that the really interesting thing about this is not the $3 gasoline or the disgusting bonus paid to Raymond, but whether or not this effective transfer payment will result in a lull in hostilities between the arab world and the west or not. Will your $3 gas fund more terror or less? Will the massive wealth being transferred out of China and the USA result in further societal unrest in the middle east? Or will the Saudi's and others import Chinese techniques for quelling domestic discontent? That's the interesting part to me.

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#19897 - 05/02/06 01:12 PM Re: The Proposed $100 Gas Rebate [Re: crackers]
Smike Offline
Carpal Tunnel

Registered: 05/01/01
Posts: 3143
Loc: in your backyard
Worries over supply faded. It became apparent that the old constant price called for in most contracts was too high -- higher than the purchaser would pay in the abundantly-supplied open market. Purchasers rebelled, with many abandoning contracts and relying instead on the spot market. To coax them back, suppliers granted pricing terms tied to a market indicator -- the spot market, for instance, or the futures market. Thus while most oil flows under contract, its price varies with spot markets. Contract arrangements for different products are discussed below.

Most of the crude oil that flows in international trade is priced by formula: a base price, usually based on a market indicator, plus or minus a quality adjustment. A common pricing term sets a base of a spot price published by a particular source or publication. For crude oil sold into the U.S. Gulf Coast, for instance, the base would commonly be the price of West Texas Intermediate crude oil. This high quality crude oil indigenous to the U.S. Southwest is an informal benchmark for the region. Analogously, crude oil sold into Northwest Europe is often tied to the spot price for the North Sea's Brent Blend, and crude sold into Singapore or other South East Asian locations is often tied to Dubai. The base price is then adjusted for quality. (As explained in the section on Oil Refining, the value of a crude oil is based on the ease with which it can be refined into high value products. Thus, denser crude oils with higher sulfur content are worth less than lighter, low sulfur ones.) Finally, the credit terms affect the realized price.



I think its best to post the whole section and not pick and chose what statements fit best. Contractual oil purchases are not a simple one to one relationship with the spot market, if so then why have a contract. Somehow I think you know this.

Again moot point in my argument since I’m debating not how the price of oil is formulated but rather the change in the price last 3 months and the change in the profit margin in the same time period.

From the pdf report posted earlier:

“According to the EIA, the spot market price of crude was $63.38 per barrel or $1.51 per gallon on January 6, 2006. The spot price increased by 12 cents per gallon by gradually climbing to $68.62 or $1.63 cents per gallon on April 12, 2006.
If the pump price of gasoline in California climbed in direct correlation with the increase in crude costs, the differential between crude costs and pump prices would remain relatively unchanged. In 2006, the differential rose from 70 cents per gallon in the first week of January to $1.18 cents per gallon on April 12th (Figure 1). Pump prices climbed 48 cents per gallon more than the most generous estimate of the increased price of crude oil for refiners. “


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#19898 - 05/02/06 01:23 PM Re: The Proposed $100 Gas Rebate [Re: crackers]
Daniel Online   content
veteran

Registered: 05/23/01
Posts: 1515
If the Straits of Hormuz are closed, oil is still fungible; there's just less of it on the market, but it's all still openly traded and would be somewhat more expensive. That shipment from Qatar isn't going to anybody, and every other barrel of oil is still the same. So we could pay for a barrel of oil from our own producers, or from Russia, or Venesuela, or Nigeria. Why not buy it from Nigeria to add to the reserve if it's cheaper?

Seems to me that the only reason we'd want to subsidize our own oil production for security purposes would be to guard against the possibility of a boycott by so many suppliers that it would leave us short of oil for vital national needs. But it would be very hard for enough suppliers to maintain a boycott because as more players joined, the price we'd be willing to pay would go up, which provides an ever increasing incentive for others not to join it and for existing boycotters to bolt.

Also, it seems to me (admittedly without much background in this area) that the subsidies to oil companies far exceeds what would be justified to ensure production for vital national needs. If there ever were a concerted boycott, we simply don't have the domestic capacity to provide our own supply indefinitely. And that's why we have the stragetic reserve, in case we need to buy ourselves some time. But I don't see why that would justify paying an artificially higher price from domestic producers to add to it.

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#19899 - 05/02/06 01:57 PM Re: The Proposed $100 Gas Rebate [Re: Daniel]
crackers Offline
Carpal Tunnel

Registered: 03/21/01
Posts: 3424
Loc: pdx

Also, it seems to me (admittedly without much background in this area) that the subsidies to oil companies far exceeds what would be justified to ensure production for vital national needs. If there ever were a concerted boycott, we simply don't have the domestic capacity to provide our own supply indefinitely. And that's why we have the stragetic reserve, in case we need to buy ourselves some time. But I don't see why that would justify paying an artificially higher price from domestic producers to add to it.


two different things:

1) the ability to fight a war is the reason to have the strategic reserve. It's not (supposed to be) for anything else. We buy US oil to subsidize production to try to keep production going to fight said war...It's not a boycott we're worried about, it's a general war on the sea disrupting non military shipments.*

2) the size of the subsidies generally given to big oil are ludicrous and evil. but that's just my opinion


*obviously anybody thinking this is even remotely possible has no idea how strong the US Navy is in comparision to the rest of the planet's combined naval forces. For point of comparison, a USN destroyer is about the same size as an Indian or Chinese light cruiser and as for firepower, well, ...

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#19900 - 05/02/06 02:15 PM Oil Subsidies [Re: crackers]
Daniel Online   content
veteran

Registered: 05/23/01
Posts: 1515
the ability to fight a war is the reason to have the strategic reserve. It's not (supposed to be) for anything else. We buy US oil to subsidize production to try to keep production going to fight said war

There seems to be two different statements here. The first is that we have the strategic reserve in order to be able to fight a war. The second is that we subsidize US production to be able to fight a war. Which is it? Both?

Again, I see no reason to buy US oil to put into the reserve if other sources are cheaper. If we want to have US production ready to go in case of an emergency, then spending money on that purpose might make a cost-effective backup. But that doesn't justify subsidies for US production when there isn't a war going on, or spending more money for more expensive oil to put into the reserve. (Yes, I know one can't turn on oil production at the flip of a switch, but the reserve is supposed to buy us that time, no?)

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#19901 - 05/02/06 04:19 PM Re: Oil Subsidies [Re: Daniel]
ScottR Offline
journeyman

Registered: 05/27/05
Posts: 99
The point you are missing Smike is that while there is correlation between crude prices and gasoline, that doesn't equate causality. Oil could flow down the Hudson tomorrow and w/o the ability to refine it, it is worthless. If you actually knew anything about the oil markets, you would notice how much the spreads have widened between light sweets and heavys. What this is conveying is the limited refining capacity, specifically heavy crude refining capacity and the scramble to secure supplies of light blends.

If you take a look at a Valero 5 yr chart against Exxon, you will see what I am talking about. Valero is mainly in the downstream business, ie. refining. You might even notice in driving around that Valero is generally 3 to 5 cents cheaper per gallon than most other stations (those evil oil companies).

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#19902 - 05/02/06 04:50 PM Re: Oil Subsidies [Re: ScottR]
Smike Offline
Carpal Tunnel

Registered: 05/01/01
Posts: 3143
Loc: in your backyard
Good point, the Quality factor does play a roll. I still see point A (Price of spot market oil over the last months ((assuming it’s the highest number -/+ for Quality)) vs. Point B. price of gas over the last 3 months and I can not find any substantial facts or figures that support current price at the pump other then ‘speculation’ of shortage. Unless the supply of more easily refinable oil has fallen dramatically in the last 3 months while the overall supply is more or less unchanged. I know there is no smoking gun, but one has to wonder that overall mergers and consolidation on the downstream and upstream end, has put more control on pricing in the corporations hands and less on actual market influences. (Or at the very least can increase the effect on the price upswing end)

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