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What Effect Would Oil Price Control Have?

General discussions of the systemic, societal and civilisational effects of depletion.

If Russia declared they will sell the same number of barrels but they require $40/bbl

Poll ended at Tue 24 May 2016, 15:04:10

Nothing would change, prices are due to the over supply and nothing else.
5
33%
Everyone else exporting oil would set their price just below Russia.
3
20%
Russia would sell less oil but get more for what they do sell.
3
20%
Saudi Arabia and/or OPEC would set their price at the same as Russia.
1
7%
None of the above, explanation in thread.
3
20%
 
Total votes : 15

What Effect Would Oil Price Control Have?

Unread postby Tanada » Wed 24 Feb 2016, 15:04:10

World oil demand has continued to grow every year.

1Q 2013 90.74 MM/bbl/d
1Q 2014 91.89 MM/bbl/d
1Q 2015 93.50 MM/bbl/d
1Q 2016 94.50 MM/bbl/d

IOW the world has consumed more oil every year for the last four year despite prices in 1Q 2013 and 1Q 2014 being in the $75/bbl-$90/bbl range.

There Is No Demand Destruction!

That leaves the other side of the supply/demand equation, to wit supply. Price barring artificial factors like taxes and price controls, is a relationship of supply available and the price at which that supply meets demand. As ROCKMAN has pointed out many times every barrel being offered for sale is finding a buyer at the current price.

If Russia tomorrow morning declared they would sell the same number of barrels of oil as they are selling today, but they require $40/bbl for every one of those barrels what would happen? Remember they are not restricting supply at all, just requiring a fixed price for their supply.

Also keep in mind De Beers Corporation keeps the price of Diamonds right where they want it by refusing to sell them for less, and they go out of their way to buy up every diamond that hits the market at a lower price to prevent themselves from being undercut.

So the purpose of this poll is to determine the economic mindset of the forum membership. Please answer honestly and if you really believe you are correct you can post your justifications in thread to back up your selection.
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Re: What Effect Would Oil Price Control Have?

Unread postby Plantagenet » Wed 24 Feb 2016, 16:06:13

Tanada wrote:If Russia tomorrow morning declared they would sell the same number of barrels of oil as they are selling today, but they require $40/bbl for every one of those barrels what would happen?


Now that the US oil export ban is repealed US oil producers would go to Russia's customers and offer to sell their oil for $30.00 bbl. Iran would be right there to sell their oil too. Heck the UAE has so much unsold oil they are giving it away-----they'd probably be willing to sell for $10 bbl/

UAE-Offers-India-Free-Oil

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Re: What Effect Would Oil Price Control Have?

Unread postby Outcast_Searcher » Wed 24 Feb 2016, 16:27:09

Tanada wrote:World oil demand has continued to grow every year.

1Q 2013 90.74 MM/bbl/d
1Q 2014 91.89 MM/bbl/d
1Q 2015 93.50 MM/bbl/d
1Q 2016 94.50 MM/bbl/d

IOW the world has consumed more oil every year for the last four year despite prices in 1Q 2013 and 1Q 2014 being in the $75/bbl-$90/bbl range.

There Is No Demand Destruction!

Right. The argument that suddenly humanity can't afford oil for roughly a THIRD of what it cost in 2010-2014 with both the global GDP AND global oil demand continuing to grow is nonsensical. (It feeds the short term doom meme though. :roll: )

Also keep in mind De Beers Corporation keeps the price of Diamonds right where they want it by refusing to sell them for less, and they go out of their way to buy up every diamond that hits the market at a lower price to prevent themselves from being undercut.

True, but there is a HUGE difference between diamonds for jewelry and oil.

1). Debeers controls (or is widely reputed to control) roughly 80% of the global diamond (jewelry quality) market. Thus, if they truly withhold a significant percentage of supply, it makes a real difference in actual available supply.

2). Diamonds are unique. It's not like there are effective substitutes. This could change over time (i.e. a massive marketing campaign could push hard for sapphires, etc. instead), but until then -- diamonds are traditional and the lack of substitutes AND item one gives DeBeers huge control over pricing.

3). Once allowing for grade differences and shipping differences, oil is globally fungible. Barrel A from Russia isn't any different to a motorist wanting the gasoline or diesel than barrel C from Canada or barrel U from the USA.

4). Russia produces a relatively small percentage of the global supply of oil. Round numbers, roughly 11% looks about right. http://www.tradingeconomics.com/russia/ ... production
Thus, Russia has very little control over the price of oil globally, UNLESS OTHER OIL IS UNAVAILABLE.

So the purpose of this poll is to determine the economic mindset of the forum membership. Please answer honestly and if you really believe you are correct you can post your justifications in thread to back up your selection.


So given items 3 and 4 above, if Russia mandates a minimum price of $40, unless the rest of the world volunteers to form a cartel and go along, two stages would occur (assuming the global price remains meaningfully below $40 as long as there is plenty in storage -- i.e. no untoward geopolitical events, etc.):

1). At first, Russia would sell almost no oil. Oil would be drawn down from available stockpiles since the global glut is a small fraction of the 10 million+ BPD Russia produces.

2). Unless Russia stops producing before it runs out of storage, they royally screw their oil industry. Where does the oil go if they can't sell it or store it? They'd have to shut in production once storage fills.

3). Once the global supply in storage gets on the lean side, then the Russian barrels the world wants above the amount the rest of the world is supplying at $30ish a barrel could very likely be sold for $40. The demand side for oil tends to be highly inelastic, especially in the short term, due to lack of flexible serious alternative transportation systems in much of the world.

At this point, I'm not completely sure what happens to the global price of oil. I suspect it would head quickly toward $40, based on investor perception of limited supply.

....

Obviously there are assumptions here, but this seems the most realistic general outcome, barring other unrelated major changes in the market. For a fungible commodity, Russia can't just hold its breath and refuse to sell it for less than an arbitrary price. As long as there are ample alternatives available, self-interested buyers will merely buy elsewhere.

In micro-economics this principle was illustrated by the classic bushel of wheat. A bushel of wheat isn't special. A farmer wanting to sell wheat gets the market price, or doesn't sell their wheat.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: What Effect Would Oil Price Control Have?

Unread postby Outcast_Searcher » Wed 24 Feb 2016, 17:09:55

pstarr wrote:I chose "Saudi Arabia and/or OPEC would set their price at the same as Russia."

Seeing as Russia has a ready market among relatively wealthy Western Europe and Asian markets, it will not lose much or any sales. Likewise Saudi Arabia and other ME producers who sell to many of the same customers also have lots of wiggle room to raise prices.

Seriously, if this strategy would work -- if just naming whatever price some major producing country wanted could magically transform the global price to that price, why stop at $40? Why not $50? Or $100 for a return to the heady days of 2010-2014?

A cartel comprising a fairly small percentage of output can't control the global price in a world currently awash in oil.

...

Now, down the road, if oil shortages become the perceived norm, then that changes. But of course the market will take care of escalating the price just by its nature.
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Re: What Effect Would Oil Price Control Have?

Unread postby Subjectivist » Wed 24 Feb 2016, 18:04:15

I picked option 2. I think several OPEC members like Venezuela and Kuwait would be thrilled to announce they are maintaining production and selling for say $38/bbl. That way Saudi Arabia sells all theirs for the basement price, somewhere around $29-30/bbl. After the market buys all the Saudi oil available they move on to the next cheapest seller and so on getting to Kuwait and Venezuela at $38/bbl and buying all they have available. After everyone else has sold out their capacity for less than Russia requires there is still about 8 MM/bbl/d of current demand still in the market. Some of that will be offset with stored oil that was bought in the last three months when prices have been at their lowest level, but much of the oil in storage was bought at $50/bbl or higher. For the people holding that higher price oil it would be more economically advantageous to buy $40/bbl Russian oil than pull their expensive oil out of storage.

So Russia offers 8 MM/bbl/d into the market at $40/bbl and the first week or month they sell only 6 MM/bbl/d, but they get 25 percent more for every bbl at $40 than they did at $30 so economically it is a wash.

Then over the next quarter as the stored oil that was cheaper than $40/bbl gets used up the rest of the market won't be able to cover as much of the gap and Russia's sales will creep up to 7 MM/bbl/d and they will be earning more than they did before they set their sale price. At the same time American output and non OPEC output elsewhere will continue to slowly fall offset by Iran slowly growing. Either way late this year or early next the world will have a slight shortfall between supply and prices world wide will go over $40/bbl based on all the projections I have seen posted here. I need a Middle East war to win the PO price challenge, right now I am still in last place.
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Re: What Effect Would Oil Price Control Have?

Unread postby Plantagenet » Wed 24 Feb 2016, 18:14:49

pstarr wrote:
Plantagenet wrote:
Tanada wrote:If Russia tomorrow morning declared they would sell the same number of barrels of oil as they are selling today, but they require $40/bbl for every one of those barrels what would happen?


Now that the US oil export ban is repealed US oil producers would go to Russia's customers and offer to sell their oil ...
Cheers!

Except the United States has no $30.00 bbl oil.


????

Au Contraire…..there are over 60 MILLION BARRELS OF OIL stored at Cushing Oklahoma right now, and more being added every day. There isn't room for much more. When Cushing fills up they are going to have to start selling that oil somewhere.

cushing-crude-oil-storage-at-all-time-high

Why not export it, since the O administration has now repealed the oil export ban? Russia won't have much luck trying to jack up the oil price as long as the US, UAE, Iran, etc. are desperate to sell their oil.

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Re: What Effect Would Oil Price Control Have?

Unread postby Subjectivist » Wed 24 Feb 2016, 18:35:46

Plantagenet wrote:
pstarr wrote:
Plantagenet wrote:Except the United States has no $30.00 bbl oil.


????

Au Contraire…..there are over 60 MILLION BARRELS OF OIL stored at Cushing Oklahoma right now, and more being added every day. There isn't room for much more. When Cushing fills up they are going to have to start selling that oil somewhere.

cushing-crude-oil-storage-at-all-time-high

Why not export it, since the O administration has now repealed the oil export ban? Russia won't have much luck trying to jack up the oil price as long as the US, UAE, Iran, etc. are desperate to sell their oil.

Cheers!


A lot of that stored oil was bought for more than $50/bbl, not under $30/bbl. think for a minute, the price didn't break below $50 until late last year.

Here, I edited to show this I just dug it up for this thread.

The WTI price was $50.88 per barrel on July 17, 2015, $1.86 below last
week’s price and $52.95 under a year ago. The spot price for conventional
gasoline in the New York Harbor was $1.876 per gallon, $0.118 lower
than last week’s price and $0.901 less than a year ago. The spot price
for ultra-low sulfur diesel fuel in the New York Harbor was $1.654 per
gallon, $0.071 below last week’s price and $1.193 under a year ago.

The national average retail regular gasoline price increased to $2.802
per gallon on July 20, 2015, $0.032 under last week’s price and $0.791
below a year ago. The national average retail diesel fuel price decreased
for the eighth week in a row to $2.782 per gallon, $0.032 per gallon less
than last week and $1.087 under a year ago.

Crude Oil (Excluding SPR) +2.5 to 463.9
Total Motor Gasoline -1.7 to 216.3
Distillate Fuel Oil +0.2 to 141.5
Other Oils +1.9 to 452.3
Crude Oil in SPR +0.5 to 695.1
Total US Petroleum Inventory +3.4 to 1,969.1
[/quote]

Before that report every barrel in storage was bought for more than $50/bbl.

Last weeks report thanks to Rabbit,

Rabbit wrote:Data for week ending Feb 12 | Release Date Feb 18 | Next Release Date Feb. 24, 2016

The WTI price was $29.32 per barrel on February 12, 2016, $1.54
under last week’s price and $23.34 below a year ago. The spot price for
conventional gasoline in the New York Harbor was $1.066 per gallon,
$0.041 higher than last week’s price but $0.551 less than a year ago. The
spot price for No. 2 heating oil in the New York Harbor was $0.967 per
gallon, $0.007 under last week’s price and $0.943 below a year ago.

The national average retail regular gasoline price decreased for the
seventh week in a row to $1.724 per gallon on February 15, 2016, $0.035
below last week’s price and $0.550 under a year ago. The national
average retail diesel fuel price decreased for the fourteenth week in
a row to $1.980 per gallon, $0.028 per gallon less than last week and
$0.885 lower than a year ago.

Crude Oil (Excluding SPR) +2.1 to 504.1
Total Motor Gasoline +3.0 to 258.7
Distillate Fuel Oil +1.4 to 162.4
Other Oils -3.1 to 416.2
Crude Oil in SPR No Change at 695.1
Total US Petroleum Inventory +3.4 to 2,036.5
[/quote]

So there was only a small increase in storage after the price of oil fell under $50/bbl, so there isn't all that much cheap oil actually in storage.
Last edited by Subjectivist on Wed 24 Feb 2016, 19:20:37, edited 3 times in total.
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Re: What Effect Would Oil Price Control Have?

Unread postby Outcast_Searcher » Wed 24 Feb 2016, 18:47:51

pstarr wrote:
Outcast_Searcher wrote:
pstarr wrote:I chose "Saudi Arabia and/or OPEC would set their price at the same as Russia."

Seeing as Russia has a ready market among relatively wealthy Western Europe and Asian markets, it will not lose much or any sales. Likewise Saudi Arabia and other ME producers who sell to many of the same customers also have lots of wiggle room to raise prices.

Seriously, if this strategy would work -- if just naming whatever price some major producing country wanted could magically transform the global price to that price, why stop at $40? Why not $50? Or $100 for a return to the heady days of 2010-2014?

Why stop at $40? Because that is the condition of the questionnaire.

Fine.

Check and mate. Being pedantic will win you a Nobel Prize in economics. :roll:
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Re: What Effect Would Oil Price Control Have?

Unread postby Plantagenet » Wed 24 Feb 2016, 19:13:22

Subjectivist wrote:
A lot of that stored oil was bought for more than $50/bbl, not under $30/bbl. think for a minute, the price didn't break below $50 until late last year.


So what?

No matter what the original price of the oil, it is now worth the current market price of oil. It doesn't magically retain its original value.

If the owners of that oil want to stop paying storage fees and sell the oil, they will have to sell at the current market price.

Cheers!
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Re: What Effect Would Oil Price Control Have?

Unread postby Subjectivist » Wed 24 Feb 2016, 19:26:50

Plantagenet wrote:
Subjectivist wrote:
A lot of that stored oil was bought for more than $50/bbl, not under $30/bbl. think for a minute, the price didn't break below $50 until late last year.


So what?

No matter what the original price of the oil, it is now worth the current market price of oil. It doesn't magically retain its original value.

If the owners of that oil want to stop paying storage fees and sell the oil, they will have to sell at the current market price.

Cheers!


So you honestly believe the oil storage companies would rather sell their expensive stored oil instead of just buying 30/bbl oil on the market today? The storage fees would have to be really high to justify that kind of a decision.
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Re: What Effect Would Oil Price Control Have?

Unread postby ROCKMAN » Wed 24 Feb 2016, 21:52:54

I'm sure there were some good comments but just didn't ha e ethe energy tonight to go thru them all.

But my story doesn't change: no refiner is going to pay $40/bbl if they can't forecast selling their products at an acceptable profit margin. And the same is just as true for $20/bbl as it is for $100/bbl. The infl. adj. price of oil in the late 90's was $17/bbl and not $18/bbl because that's what the refiners needed to pay in order to make an acceptable profit. Same reason they paid $100/bbl a while back.

Not let's jump into another universe: all oil sellers agree: every bbl sells for $40/bbl or they don't sell. Now it get rather theoretical...to a degree: some consumers can still buy refinery products that are priced to allow those refineries to make a profit. Obviously no refinery is going to intentionally lose money. But the consumers that couldn't afford those product prices still can't. After all has anyone here ever negotiated what they paid for gasoline? No: you paid the posted price but only for what you had to buy. And even then there are folks who can't even do that.

So to some degree in this mandatory $40/bbl universe less refinery products are sold. Which means less oil is purchased. But how much less? Who knows: it's a fictional construct. So one scenario:the producers are selling less oil but getting a higher price per bbl. But what of the total income: is it greater then the $30/bbl days or greater in the new mandatory $40/bbl days? Who knows? But there are just two possible answers: yes or no.

So let's look at YES: higher total income income at $40/bbl. Great for the producers and oil consumers. But what of the consumers no longer consuming as much? How does that affect the economy. Thank goodness we have ECONOMISTS to answer that question. Unfortunately half say no problem for the economies and the other half say big problems. And now we're back to the big debate over the relationship (or lack thereof) between energy consumption and economic vitality.

Well I think I've set the stage so take over. LOL.
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Re: What Effect Would Oil Price Control Have?

Unread postby Tanada » Wed 24 Feb 2016, 23:18:13

ROCKMAN wrote:I'm sure there were some good comments but just didn't ha e ethe energy tonight to go thru them all.

But my story doesn't change: no refiner is going to pay $40/bbl if they can't forecast selling their products at an acceptable profit margin. And the same is just as true for $20/bbl as it is for $100/bbl. The infl. adj. price of oil in the late 90's was $17/bbl and not $18/bbl because that's what the refiners needed to pay in order to make an acceptable profit. Same reason they paid $100/bbl a while back.

Not let's jump into another universe: all oil sellers agree: every bbl sells for $40/bbl or they don't sell. Now it gets rather theoretical...to a degree: some consumers can still buy refinery products that are priced to allow those refineries to make a profit. Obviously no refinery is going to intentionally lose money. But the consumers that couldn't afford those product prices still can't. After all has anyone here ever negotiated what they paid for gasoline? No: you paid the posted price but only for what you had to buy. And even then there are folks who can't even do that.

So to some degree in this mandatory $40/bbl universe less refinery products are sold. Which means less oil is purchased. But how much less? Who knows: it's a fictional construct. So one scenario:the producers are selling less oil but getting a higher price per bbl. But what of the total income: is it greater then the $30/bbl days or greater in the new mandatory $40/bbl days? Who knows? But there are just two possible answers: yes or no.

So let's look at YES: higher total income income at $40/bbl. Great for the producers and oil consumers. But what of the consumers no longer consuming as much? How does that affect the economy. Thank goodness we have ECONOMISTS to answer that question. Unfortunately half say no problem for the economies and the other half say big problems. And now we're back to the big debate over the relationship (or lack thereof) between energy consumption and economic vitality.

Well I think I've set the stage so take over. LOL.


I didn't pick the $40/bbl figure from pure randomness ROCKMAN, I selected a number half way between today and the fourth of July 2015, more or less. Last 4th of July I was thrilled to be filling my tank for $2.00/gallon for the first time since late 2008, at the time WTI was contracting for about $52/bbl on the exchanges. I am fairly confident, though I hold no Economics degree, that $2.00/gallon gasoline would be quite a boon for Ohio compared to the $3.25 we averaged around these parts in 2013 and 2014. I also figure it is close enough to where we are now to continue the current restrictive rate of shale fracking drilling and complete the 'collapse' if that is what is going on so KSA wouldn't get its nose bent to far out of shape by Russia setting such a price.

No doubt some marginal use would poof away again at $2.00/gallon in Ohio, but prices have been floating as low as $1.48 and as high as $1.98 here for the last two months without many people paying much attention. People buy what they need mostly pay at the pump on a credit card and often don't shop around for the best price just go to the same routine station week after week. Most of us didn't suddenly start taking leisurely Sunday drives when prices went under $2.00 because we typically burn the same amount week in and week out running errands and commuting to work. If the price suddenly doubled like they did between 2005 and 2007 the employed would mostly still buy the same amount for commuting because even at double today's price we would still be cheaper than January 1, 2015 and we managed those prices fairly well. The numbers I used in my post to start this thread came from the EIA, I would have gone back further but the graph they posted started with 2013. By hook or by crook the world has burned more oil every year, price high and price low.

Oh and congrats for recognizing how Russia would benefit from this in the moderate term, the world is finding a buyer for every barrel offered at $32 today, and it was finding buyers for every barrel last July at $52. The three biggest producers, USA/Russia/KSA are simply too large to be wholly replaced in the world market. There is not enough spare capacity combined in all of the Earth to fully replace any of these three if something caused them to set a price. Right now the world supply is growing in some places, notably Iran and Iraq. However Libya remains a mess and their production has a long way to go to resume its pre Arab Spring levels. So far the rest of the world has been able to replace Libya, and during sanctions and ISIS disruptions Iran and Iraq respectively. However those three together are less than Russia exports, and with the sanctions off Iran should creep back up over 4 MM/bbl/d within the next 12-18 months. If Russia succeeds in destroying ISIS in Syria and Iraq keeps asking them for help there is a good chance Iraq will stabilize as well and who knows how much they will be pumping five years after that.
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Re: What Effect Would Oil Price Control Have?

Unread postby Outcast_Searcher » Wed 24 Feb 2016, 23:47:58

Tanada wrote:No doubt some marginal use would poof away again at $2.00/gallon in Ohio, but prices have been floating as low as $1.48 and as high as $1.98 here for the last two months without many people paying much attention. People buy what they need mostly pay at the pump on a credit card and often don't shop around for the best price just go to the same routine station week after week.

Well, where I live, a small city in the midwest, the pricing seems efficient enough in the VAST majority of the local stations, that I'm not convinced it pays to shop around. Driving takes gas. The internet has been pretty random on being current enough on local pricing.

I pay attention (out of curiosity) and on any given day, the major competitors like Shell and Speedway will have virtually identical prices all over town. And when the prices change, they often change by as much as 30 cents a day, but they all seem to change nearly simultaneously. Once in a while I'll get lucky and catch a break when prices change if I need gas, but not often.

And it would be sheer MADNESS to drive 20 minutes / a gallon round trip across town to save perhaps a nickel on an independent station who tends to have lower prices. Oh, and stand in line and unless one drives a hybrid, burn more gas while you wait. Not only for my wallet, but for the planet.

Clearly many stations are using some kind of reference price -- not sure if most (franchises?) are being directed what to charge from the "mother ship".

Realistically, though, if they don't conform they are either giving away money or angering customers (when they find out they paid too much) -- so conforming seems to be in their best interest.
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Re: What Effect Would Oil Price Control Have?

Unread postby Tanada » Thu 25 Feb 2016, 00:24:13

Outcast_Searcher wrote:Well, where I live, a small city in the midwest, the pricing seems efficient enough in the VAST majority of the local stations, that I'm not convinced it pays to shop around. Driving takes gas. The internet has been pretty random on being current enough on local pricing.

I pay attention (out of curiosity) and on any given day, the major competitors like Shell and Speedway will have virtually identical prices all over town. And when the prices change, they often change by as much as 30 cents a day, but they all seem to change nearly simultaneously. Once in a while I'll get lucky and catch a break when prices change if I need gas, but not often.

And it would be sheer MADNESS to drive 20 minutes / a gallon round trip across town to save perhaps a nickel on an independent station who tends to have lower prices. Oh, and stand in line and unless one drives a hybrid, burn more gas while you wait. Not only for my wallet, but for the planet.

Clearly many stations are using some kind of reference price -- not sure if most (franchises?) are being directed what to charge from the "mother ship".

Realistically, though, if they don't conform they are either giving away money or angering customers (when they find out they paid too much) -- so conforming seems to be in their best interest.


One of my cousins managed a Speedway station until not long ago when she retired to care for her mother. From what she told me the Franchise supply company keeps close tabs on prices within 1 mile of each station they service. If the competitor prices moved she would get a phone call within an hour telling her which way and how much to move the prices at her station. It really isn't all that hard these days, for one thing the state keeps tabs on how much tax income they expect every day which requires not only number of gallons sold it also requires price figures because part of the tax is sales tax.

I wouldn't be surprised to learn that in 2016 every station with an internet connection is under continuous information flow, which would let anyone looking at the numbers for an area know what price each station is charging.
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Re: What Effect Would Oil Price Control Have?

Unread postby tita » Thu 25 Feb 2016, 07:48:47

When we say every barrel of oil get a buyer, that doesn't mean it instantly goes in the tank of a car. First you have to wait for it to physically appear (it's a future market), then the buyer (refineries) usually put it in storage before using it. So, what happens if a producer suddenly wants higher price than the market offer? He probably won't sell it and will have to store it somewhere, and pay a fee, and don't get any money. And if he really needs the money, he will probably sell it at the market price.

The consumers don't store gas when it's cheap and sell it when it's expensive. Producers don't do it with oil either. They are 'links' between them who have this job. And as there is actually more oil produced than gasoline consumed, these 'links' have no other choice than to put more oil in storage and set the price at a value that will eventually balance both ends.
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Re: What Effect Would Oil Price Control Have?

Unread postby Tanada » Thu 25 Feb 2016, 10:05:02

tita wrote:When we say every barrel of oil get a buyer, that doesn't mean it instantly goes in the tank of a car. First you have to wait for it to physically appear (it's a future market), then the buyer (refineries) usually put it in storage before using it. So, what happens if a producer suddenly wants higher price than the market offer? He probably won't sell it and will have to store it somewhere, and pay a fee, and don't get any money. And if he really needs the money, he will probably sell it at the market price.

The consumers don't store gas when it's cheap and sell it when it's expensive. Producers don't do it with oil either. They are 'links' between them who have this job. And as there is actually more oil produced than gasoline consumed, these 'links' have no other choice than to put more oil in storage and set the price at a value that will eventually balance both ends.


Yes but I specifically picked Russia because they are over 10 percent of world production. No other seller or group of seller could currently replace that entire 10 percent of oil even pumping everything they could at maximum flow rates, and it wouldn't be in their interest to do so in any case. Why would Saudi Arabia up their production by 1 MM/bbl/d just to keep prices below $40/bbl when they accepted those prices quite happily three months ago? Also while Russia profits pretty well from selling Oil it is far from their main source of income. They are not KSA, for them having to fill some tankers with excess oil and sit on it for a few weeks would be at most an inconvenience, not a disaster. As you pointed out yourself the whole process would actually be selling future oil, not current production. By the time those contracts came due everyone would have already made whatever adjustments they needed to, from taking some of the cheaper oil out of storage on the refiners end of the system, to adjusting what price they were willing to sell at on the producers end of the system.

Most of us talk about the current oil paradigm as if it is the only possible way for things to work. Well before USA peak in 1970 the current paradigm did not exist, the Texas Rail Road Commission set production rates for every oil company in Texas to indirectly set the price of oil through supply management. Futures trading has a pretty long history, almost as long as stock exchange markets. However futures trading before 1970 was used for the purpose of smoothing out the bumps in supply and demand. Between 1970-1986 oil futures transitioned from simply smoothing things out to trying to make a massive profit in and of itself. It went from being just a tool to being an economic driver in its own right. To be a successful oil futures trader you need a large bank account, skill and a dash of luck. It, like stocks, is no longer about the intrinsic value of the product being contracted, now it is about the perceived value in the minds of the other traders. Trader A believes the price will go up so he looks around for a news source that says the opposite. When that news item appears Trader A offers a few contracts at a price reflective of that news item or rumor or whatever, then when he thinks the price has bottomed for that cycle he buys back what he sold for a lower price and viola he shows a profit for the day. The vast majority of futures contracts are no longer actually tied to actual product, they are just a financial instrument for fleecing less skilled traders of their valuable cash.

For better or worse the futures contract system has worked fairly well for the last 30 years, but that doesn't mean it will always be in the driver seat. Futures contracts are basically an auction system, you put out a request to buy or sell a given quantity of whatever commodity and then you either accept or decline the different offers you get. When was the last time you walked into your local quickmart for a case of beverages and then negotiated the price with the cashier? Unless you are buying on some street market or flea market environment where haggling is part of the process I doubt you have ever haggled for your beer or soda-pop with the seller. The seller sets a price and you accept it or you do not buy.

So you are Russia and you instruct your oil companies that they will no longer make any sales contracts for less that $40/bbl. What happens? Well the first day Russian exporters offer contracts for oil as usual, but they only accept bids that are $40/bbl or higher. They don't have to make a big splashy announcement or anything, they just pass on any offers below their set point. Pretty soon the futures traders who actually trade contracts for the purpose of moving oil discover they have contracted for all the oil they can at $30/bbl but they don't have enough oil to cover all their existing demand. At this point they look at the market and they see all those Russian contracts sitting their unbought in the contract system. They offer modestly more for the contracts they need, but still don't close the deal. They offer even more for the oil they need and still no offers are accepted. Pretty soon some trader or another in the real system offers to pay the magic $40/bbl for a single contract and the computers close the deal. With a sigh of relief because now they get the picture more traders offer $40/bbl until they reach their import requirement for that day. Maybe Russia sells every barrel offered, maybe not, but every barrel actually sold went for $40/bbl.

Now from what I understand of the oil futures contracting system what happens? Well those Russian contracts sold late in the day to the people who really needed to import oil to meet demand, however the vast bulk of oil contracts are not for real oil, they are just contracts used to generate cash flow as I said earlier. However the whole of the market has an expectation that prices each day will be not too wildly different than the closing price of the previous day. The whole of the international market in the computers at least recorded the fact that the last 3 MM/bbl of contracts sold yesterday went for $40/bbl. Therefore when the market opens in Tokyo there is already the expectation that the price will be closer to $40/bbl than it was the day before. They still want to make good deals so when they start the day they offer $32/bbl to see if they get any takers. KSA agrees and sells off their oil to 'ensure maximum market share' and this holds prices down for a while, but countries like Venezuela and Quatar and Kuwait that have been pushing for price stabilization each individually decide that if Russia was getting $40/bbl at close yesterday they can get much better than $32/bbl today and they hold out for better offers settling at $35/bbl or maybe $38/bbl until all the oil they can sell for that day is sold into the market. By noon the market software has reached a conclusion that the price is trending up so even in the shadow market contract prices are rising. When the importers have bought all the contracts they could for under $40/bbl they still have a significant gap in their demand so they again contract for Russian oil at $40/bbl. Again Russia is left with some unsold oil contracts at the end of the day, but they still sold most of their oil and they got more for it than they have been getting for the last few months.

By the third day Saudi Arabia sees that everyone else is selling for increments up to $40/bbl and for two days they have sold at a significant discount from that price. Saudi Arabia is offered $32/bbl and turns it down, then $33-$35/bbl which they finally accept selling their daily exports for prices up to $35/bbl but selling everything and protecting their market share. The smaller OPEC players on the other hand sell theirs for more, accepting bids for $35 on up to $39/bbl before they too run out of physical contracts to sell for that day. Russia is in effect the swing producer, they accept no bids under $40/bbl but they offer plenty of contracts every day. The market computer programs have no problem detecting the pattern, each day as contracts are put up for sale in the system they automatically bid at the low input by the traders and keep raising their automatic bids until they have bought the needed number of contracts or the trader tells them to stop. Somewhere during this whole process countries like the UAE with its 'full storage tanks' gladly sell their stored oil into the market to fill the gap between what the market wants to pay and what Russia is willing to sell for. However most oil in storage is in working storage, the tanks that hold oil in transit or at refineries to be consumed at need. Despite the much ballyhooed typing about oil tanks being filled to the brim static storage really isn't a large part of the system. Total USA storage for January was at a low of 1749.8 in the first report in 2014 and a high of 2007.7 in the first report for 2016. 58 MM/bbl of storage sounds like a lot, until you remember we burn through that in four and a half days. Right now we are just coming out of a cycle where prices fell to yearly lows an they bought as much cheap oil as they could to shove into storage.

How much oil is really in static storage out their around the world? No doubt there is some, maybe as much as 500 MM/bbl if you count it all very carefully. Now remember, we consume 95 MM/bbl/d. Also remember oil only broke below $40/bbl December 7, 2015 so anything put into storage before that cost more. If that oil stored in the UAE tanks were really a problem they would offer it into the contract market for $25/bbl and it would be sold in a few hours.
Alfred Tennyson wrote:We are not now that strength which in old days
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