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Old 11-05-2014, 12:21 PM   #1
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Who said, "supply doesn't affect oil prices"?

published Wednesday, November 5th, 2014
Oil prices tumble on Saudi discount move
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Trader Peter Tuchman, foreground right, works on the floor of the New York Stock Exchange on Tuesday. Stocks edged lower Tuesday, led by a drop in energy stocks as the price of oil fell to its lowest in four years following reports that Saudi Arabia has cut its prices to the U.S.
Trader Peter Tuchman, foreground right, works on the floor of the New York Stock Exchange on Tuesday. Stocks edged lower Tuesday, led by a drop in energy stocks as the price of oil fell to its lowest in four years following reports that Saudi Arabia has cut its prices to the U.S.
Photo by Associated Press /Chattanooga Times Free Press.
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The average price of regular gas fell slightly again Tuesday in Chattanooga to $2.62 per gallon, down 41 cents from a month ago and 43 cents below what gas cost a year ago. Chattanooga gas prices, on average, are 35 cents per gallon below the U.S. average, according to the AAA fuel price survey of service stations.

LONDON Oil prices slumped to multiyear lows on Tuesday after Saudi Arabia cut the price of oil sold to the U.S., a move that is shaking an already volatile market but will likely give the world economy an unexpected stimulus.

The 25 percent or so slide in oil prices since the summer could boost consumer spending and business investment in many economies around the world as fuel bills fall.

But not everyone's a winner. Oil producing countries like Russia and Venezuela, which have high extraction costs and whose budgets rely on assumptions of relatively high energy prices, stand to lose out. And lower prices could eventually slow down booming production in the U.S., offsetting the benefit of lower energy costs for consumers and businesses.

U.S. oil dropped another 2 percent Tuesday to $77.19, at one point falling to $75.84, the lowest level since October 2011. It was trading at $100 a barrel as recently as July. Brent, the international benchmark, declined 2.3 percent, to $82.82, having earlier fallen to $82.08, its lowest level in just over four years.

Adam Slater, senior economist at Oxford Economics, reckons the recent fall in oil prices, if sustained, could add around 0.4 percent to GDP in the U.S. in two years, and a little less in Europe. China, which is the second-largest oil consumer and on track to become the largest net importer of oil, could see GDP 0.8 percent higher than it otherwise would have been.

"This is similar to a surprise stimulus," said Slater.

Though a drop in demand is a factor in the current slump amid concerns over global growth, Slater says supply-side factors are having a much bigger impact than back in 2008, when demand plummeted as the global economy tanked. The rise of fracking in the U.S., the return of oil output from Iraq and Libya and Saudi Arabia's willingness to resist production cuts have combined to weigh on prices.

On Monday, Saudi Arabia, OPEC's largest oil producer, cut prices for customers in the U.S. The move has been interpreted as an attempt by the country to maintain its market share in the world's largest economy against supplies from the likes of Canada, Mexico and Venezuela and U.S. shale oil producers.

Phil Flynn, senior market analyst for the Price Futures Group, said Saudi Arabia's move was directly aimed at those U.S. producers, who have boosted U.S. oil output to the highest level in decades. As a result, U.S. imports of crude oil from Saudi Arabia dropped to 894,000 barrels a day in August, down from 1.3 million barrels a day in the same month a year ago.

Saudi Arabia is "threatened by U.S. oil production and they are acting to try to break the U.S. producers back," Flynn wrote in a daily newsletter to clients.

The drop in oil reverberated in the U.S. stock market. The Dow Jones transportation average rose to a new high of 8,870.90 in morning trading. Airline stocks such as American Airlines and United Continental gained close to 2 percent. Meanwhile, major oil companies such as Exxon Mobil and Chevron fell about 1 percent, while Continental Resources, which primarily operates in the U.S., fell 7 percent.

Russia and Venezuela are two countries that are considered particularly vulnerable to a sustained fall in prices as their economies are highly dependent on oil. And because their costs of production are high and baseline budget plans are considered optimistic, analysts say they stand to lose more than, say, the Gulf states.

Lower tax revenue from the fall in prices could derail public finances, potentially prompting government spending cuts or tax increases that can hurt growth.

OPEC members are due to meet on Nov. 27 in Vienna, Austria, but investors doubt the cartel will be able to agree to any reduction in production quotas given Saudi Arabia's actions. That is another reason why oil prices have remained under pressure and why many analysts think this oil price retreat may be longer-lasting than a previous bout of weakness seen in 2012.

"This time, the fall should stick a little bit more," said Slater.
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Old 11-05-2014, 12:34 PM   #2
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Economics 101: Supply & Demand, guns & butter.
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Old 11-05-2014, 01:36 PM   #3
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Have you noticed that economists seem to have fanned out across the network news programs, predicting doom and gloom if the prices stay low? Reduced incentive to increase development. Jobs. Loss of production in N. America leading to higher imports.

I don't know whether to believe them, or if it's just a scare tactic because THEY want their own investments in this boom-and-bust industry to pay off.

I've seen the economy struggle every time oil prices skyrocket. As in this last downturn, recovery is sluggish until they start to go back down, or at least stabilize for a while.

I'm just not ready to believe that there's a downside. Unless you got one of those crazy-high-paying oil boom jobs. But it's hard for me to work up a lot of sympathy there.

And when the oil companies were making obscene profits, I don't recall them showing any sympathy for my struggle to heat my house or fill the tank. That's just supply and demand we were told. That's the way it goes. Suck it up.

Odd how the story changes when the shoe is on the other foot.
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Old 11-05-2014, 02:28 PM   #4
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I've been in the oil biz 35 years, been thru quite a few booms & busts. Each one comes and goes, crappy when you're out of work, great when you're not. Have not seen any obscene profits yet, but you never know.
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Old 11-06-2014, 05:49 AM   #5
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>Have you noticed that economists seem to have fanned out across the network news programs, predicting doom and gloom if the prices stay low?<

Most have been brain washed to the failed keynesian economics, where the value of money must constantly be destroyed to aid folks in debt.

Govs of the world love the concept as all are deeply in debt.

Inflation , good, Spend Spend Spend ,

Deflation the death of the Gov.

BY their training.
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Old 11-06-2014, 11:10 AM   #6
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Looks like the Saudis are trying to break the backs of the higher cost producers. That oil is in the ground, and will come out at some point. The Saudis are scared that the U. S. could become the largest producer. The U. S. and Canada have huge reserves all-be-it at a higher cost of extraction. The longer the Saudis keep ours locked in the ground, the faster they are depleting their reserves at cheap prices. They have a conundrum. Their economy is based on easy oil money. It will not be as easy from here on out.

They raised the price until it was feasible to extract by other methods. So, their greed has caused the problem. Kind of reminds me of some stuff been going on in our country.
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Old 11-06-2014, 11:15 AM   #7
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Quote:
Originally Posted by Gulf Comanche View Post
Have not seen any obscene profits yet, but you never know.
A few moments with Google:

2007 FORTUNE 500 - 20 most profitable companies
Exxon Mobil was the most profitable company last year by far, raking in $39.5 billion in earnings.

Exxon Makes $104 Million In Profit Per Day So Far In 2012, While Americans Are Stuck With A Higher Gas Bill

10 Most valuable companies in history, adjusted for inflation:

9. Exxon-Mobil in 2007
Value then: $513.3 billion // Adjusted to 2012 dollars: U.S. $572.9 billion

6. PetroChina in 2007
Value then: $1 trillion // Adjusted to 2012 dollars: U.S. $1.12 trillion

4. Saudi Aramco in 2012
Value today: U.S. $3.6 trillion. Adjusted to 2012 dollars: U.S. $3.6 trillion.
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Old 11-06-2014, 05:18 PM   #8
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Capt. Bill: I was not referring to obscene profits by Exxon et al. I was referring to obscene profits for me.
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Old 11-07-2014, 05:21 AM   #9
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The percentage of profit on investments from oil co is?

And the gov take in taxes on the co, and on the fuel we purchase is?
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Old 11-07-2014, 10:24 AM   #10
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The oil companies spend a ton of money to make those profits, CaptTom. FF is right, google the percentage in profits and you will have an appreciation for the risk. The government makes more "profit" on energy through taxes than the oil companies and they have zero risk!
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Old 11-07-2014, 10:54 AM   #11
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Ask BP where their profits go. Methinks it is mostly to pay off unscrupulous shysters, bankrupt businesses of any kind, and anyone else looking for a handout.
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Old 11-07-2014, 05:57 PM   #12
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The oil companies spend a ton of money to make those profits, CaptTom. FF is right, google the percentage in profits and you will have an appreciation for the risk. The government makes more "profit" on energy through taxes than the oil companies and they have zero risk!
Hmm. OK, I'll take your word on the rate of return.

On the other issue, the oil they're pulling out of the ground can be viewed as belonging to all of us, or worse yet, being robbed from future generations. I'm not sure it's wrong for the government (in theory) to take a cut, allegedly to put toward the common good. Now I realize they probably won't, and don't want to start THAT debate, but in theory, I don't have a problem with the oil companies having to pay "us" to extract "our" oil.

Still, none of this negates my theory that lower oil prices aren't the catastrophe that the talking heads on all the financial programs are making it seem like. Like I said, I've repeatedly seen the economy improve when prices go down or stay steady, and watched it tank whenever they shoot up. So it's going to be hard to convince me lower prices are a bad thing.
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Old 11-07-2014, 06:34 PM   #13
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I've had those same thoughts about the petroleum belonging to all of us, CaptTom. However, we don't take the risk to get it! And where do we stop the argument? How about:

Forest products, aren't they OUR trees?

Surface water and groundwater, why should I pay to drink and use my own water?

Minerals (metals, etc.). Don't know about you, but I can't turn ore into a screw driver! But those raw minerals belong to all of us, so the screw driver should be free.

Flying from point A to point B, should we give up our airspace and the fuel for the airplanes? It's ours.

Hunting wild game for personal consumption. Don't those animals belong to all of us?

Not our risk! We have no dog in the fight.

It all starts to sound a bit socialistic, doesn't it?

I'm grateful for the companies and individuals which took on risk and invested their lives in energy, mineral and forest production. Their efforts have made our lives easier and freed us up to follow our interests, hobbies, etc.
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Old 11-07-2014, 08:50 PM   #14
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Here are some of the cities we've worked in during the last couple of years:

Sao Paulo; Rio de Janiero; Mexico City; London; Warsaw; Beijing; Shanghai; Dubai; Abu Dhabi; Doha; Brisbane; Seoul; Paris; Toulouse, Alor Setar (Malaysia).

In all these cities, even little Alor Setar, the traffic volumes are amazing. In Sao Paulo, Mexico City, Shanghai and Beijing the traffic volumes are more than amazing, they're staggering.

And this traffic volume is in motion 24/7/365.

Roll in all the cities that aren't on my list, and it continues to amaze me that (a) the world doesn't run out of oil next Tuesday at 9:00 am, and (b) that gas still costs 3 or 4 bucks a gallon. Yes, I know it's higher in Europe and other places but that's because they add on all sorts of taxes and other "socialist" charges.

And that's just the cars and trucks. Think about the hundreds of airplanes that are in the air at any given moment, and the countless ships that are underway at any given moment, and the daily consumption of oil on this planet becomes almost inconceivable.

Even more inconceivable is that there is anything left down there to pump (or frack).
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Old 11-11-2014, 05:03 PM   #15
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A few years back I read an article by a couple of geologists, an American and a Russian. The Russian believed that the earth continues to make oil and gas due to the immense pressure and heat associated w/ the sub-surface sands. I'm not sure but the American seemed to go along w/ this theory. Maybe that's an answer to Marin's question re is there anything left down there to pump.
My experience has been that about every three or four years a petroleum engineer comes up w/ a new idea or gadget that becomes the newest big thing. All the majors jump on the idea and start leasing up acreage and give it a try. Sometimes it works, sometimes not. Fracking, though, has been around since the '30s, though obviously much improvement in technique, fluids, and equipment. In my case, the Tuscaloosa Marine Shale in Louisiana/Mississippi, I have leased the same acreage in the same area 3 times over the past 9 years (Oil/gas leases are usually 3 years in length). The players still haven't got that area figured out completely, but they will. This area is an oil area, not gas.
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Old 11-11-2014, 07:33 PM   #16
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Exxon Mobil was the most profitable company last year by far, raking in $39.5 billion in earnings.


CaptTom
As was mentioned- I like to look at the percentage of profit. In 2007 Exxon showed sales of 404 billion. That's a lot of coin- but it's still less than a 10% return. Most small companies wouldn't be thrilled a bit with only a 10% return.
My complaint is how the media spins these partial facts to guarantee getting your attention.
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Old 11-12-2014, 05:17 AM   #17
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>My complaint is how the media spins these partial facts to guarantee getting your attention.<

The usual con is company X that was making 2% on its endeavors finally makes 4%.

Company X profits up 100%!!!!!!
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Old 11-12-2014, 09:04 AM   #18
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I think of a gallon of gas pretty much like the crab on our dining room table on a Sunday evening - for a very low cost really, somebody out in the Bering Sea made a huge equipment investment and braved brutal conditions so I could crack that crab leg and dip it in melted butter in the comfort of my warm house. Somebody else put up with a North Dakota winter - outside - so I could fire up my boat in July and cruise on a beautiful evening to watch the fireworks over the water. Still a bargain. They might make billions in the aggregate, but no other model makes sense. Break up the oil companies like the ATT/Bells for telecommunications? So every Joe Schmoe with a few million bucks in venture capital can drill in somebody's back yard like it was early in the industry? Talk about chaos. Just as other posters have said, the scale of consumption is so incredibly high now, its hard to think of any other industry model that would meet the demand.
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Old 11-12-2014, 11:04 AM   #19
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I think of a gallon of gas pretty much like the crab on our dining room table on a Sunday evening - for a very low cost really, somebody out in the Bering Sea made a huge equipment investment and braved brutal conditions so I could crack that crab leg and dip it in melted butter in the comfort of my warm house. Somebody else put up with a North Dakota winter - outside - so I could fire up my boat in July and cruise on a beautiful evening to watch the fireworks over the water. Still a bargain.
Similar to conversations I've had with my Koch brothers hating friends. Hey, I agree, coal is filthy. But I really like affordable electricity and until there is a better alternative I'll roll with it.
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Old 11-12-2014, 11:24 AM   #20
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Exxon Mobil was the most profitable company last year by far, raking in $39.5 billion in earnings.


CaptTom
As was mentioned- I like to look at the percentage of profit. In 2007 Exxon showed sales of 404 billion. That's a lot of coin- but it's still less than a 10% return. Most small companies wouldn't be thrilled a bit with only a 10% return.
My complaint is how the media spins these partial facts to guarantee getting your attention.
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Steve, a 10% net profit on sales is very good. On the other hand, what really counts is the return on investment. That is what the company has invested over the years to produce those sales. I would think their return on investment would be higher as the industry produces good ROI.

That being said, it takes a lot of capital and risk to build a company to that size.
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