Oil company price fixing

[mathjak107]

how come we no longer hear all about how the oil companies are all price fixing and manipulating the oil prices.. as i said earlier if they were they are the worst price fixers in history.. maybe they will be going to washington next, hat in hand

 

[chinaco]

Because that was a fire that was only a forest fire burning... now everyone is focused on the aftermath of the nuclear explosion in the economy.

IMO - something stinks with them.

But I think speculators that had no intention of purchasing the commodities were one of the key reasons prices were driven up. The Oil companies benefited at the prices went up... because of locked in low prices from past contacts that were to be delivered. But gas prices (the refined product) are set in part by the current price of oil.

It could be that they will lose money now taking delivery on older future contracts (that were inflated) they purchased.

 

[ERD50]

how come we no longer hear all about how the oil companies are all price fixing and manipulating the oil prices...

Because much of it was just an emotional outburst that ignored the rational facts. Presented with the current evidence of those rational facts, emotional outbursts simply move to the "next great outrage". Path of least resistance.

That is my observation, also based on another forum I post to, and from some friends that seem to think the oil companies have a tremendous amount of pricing control, but then cannot rationally explain why they didn't use it earlier, or are not using it now.

I can understand that people get emotional about things that impact their lives, but when you start talking about solutions, it is time to get rational.

edit: I should add - I really don't know to what degree the speculators drove up the price of oil. There *might* be something to that, but it sure is a big market, I'm skeptical. I was mainly referring to the ability of the gas companies to change the "price at the pump" at will.

-ERD50

 

[haha]

edit: I should add - I really don't know to what degree the speculators drove up the price of oil. There *might* be something to that, but it sure is a big market, I'm skeptical. I was mainly referring to the ability of the gas companies to change the "price at the pump" at will.
-ERD50

People will speculate on anything and everything. But they can go long or short, and what they do in any situation will only exaggerate the underlying supply -demand tone of the market.

It could be that because there was a lot of credit available when the crude market was strong, this bear phase is a lot deeper than it otherwise would be.

Ha

 

[soupcxan]

All this "speculator" scapegoating was a bunch of nonsense. Was any specific speculator ever identified? I'm not talking about generic terms like "hedge funds," I mean can you actually point to someone and say, yes, there is the evil speculator who was behind it? If speculators were purchasing crude or gas and then hoarding it in underground tanks, then yes, by taking physical products off the market you could substantially influence the price. But I never saw one report that this was happening. You can trade futures contracts all you want, but unless you are taking delivery of the asset you just can't influence the price in any material sense - the market for crude/oil is too large and too global for that. And there is a case to be made that speculators help provide liquidity in the market, enabling better/faster price discovery.

People like to blame the short sellers when the market is going down, but history has shown that they are often the first to detect accounting irregularities at companies and other looming problems, and thus provide a valuable signal to the market. Since short selling was heavily restricted last month, has our stock market recovered now that those evil shorts are out of the picture? I don't think so.

The reality of the situation is that both the supply and demand of oil and gasoline are highly inelastic in the short term and so even a 1% increase in demand can have a much larger effect on prices. Basic economics 101.

 

[ERD50]

All this "speculator" scapegoating was a bunch of nonsense. Was any specific speculator ever identified?

That's the way I read the situation also, but of course, I don't have all the info to know one way or the other.

I agree that I've never heard of any real evidence though - somewhere someone must have blown up over this. We know about the house flippers and others that walked away from houses, we knoew about the fraud on both sides. Where are these oil speculators?

-ERD50

 

[kumquat]

Ya, how do we deal with this? Damn oil companies, come up with a scapegoat for the increases (speculators) and no-one knows why the price falls?

/.tin-foil-hat-on Car companies want you to buy big profit SUV's, PU's and hybrids? /.tin-foil-hat-off

 

[blenhardt]

One thing that still bugs me, and I have heard no good explaination, is why diesel fuel is still about $1.00 higher than gasoline It takes less refining and is thus cheaper to produce? It was about $1.00 less than gas about a year or so ago

 

[ls99]

One thing that still bugs me, and I have heard no good explaination, is why diesel fuel is still about $1.00 higher than gasoline It takes less refining and is thus cheaper to produce? It was about $1.00 less than gas about a year or so ago

I believe heating oil and and diesel is the same stuff, with different coloring. Heating season high demand, market pricing for high demand?

The whole fuels market is a mystery to me. And as usual those who know, don't tell.

 

[HFWR]

It has something to do with "crack spreads".

I'm sure 2B, Ed the Gypsy, or Ha will be along soon to really explain...

 

[REWahoo]

One thing that still bugs me, and I have heard no good explaination, is why diesel fuel is still about $1.00 higher than gasoline It takes less refining and is thus cheaper to produce? It was about $1.00 less than gas about a year or so ago

I'm not sure how good the explanation is, but I keep hearing there are two primary reasons: strong demand and higher production costs due to the low sulfur requirement mandated last year. Here's a recent article on the subject.

 

[ls99]

I'm not sure how good the explanation is, but I keep hearing there are two primary reasons: strong demand and higher production costs due to the low sulfur requirement mandated last year. Here's a recent article on the subject.

From that article:
"It also takes more 25% more crude to refine diesel than to refine a similar gallon of gasoline, he said. "As a result, as the price of crude increases, the spread of the cost of producing diesel versus gasoline also widens.""

This to me makes no sense, probably no true either. The statement proposes that diesel is a primary distillate, all other stuff, like gasoline, kerosene etc. are byproducts.

But what do I know?

 

[Gone4Good]

If speculators were purchasing crude or gas and then hoarding it in underground tanks, then yes, by taking physical products off the market you could substantially influence the price. But I never saw one report that this was happening. You can trade futures contracts all you want, but unless you are taking delivery of the asset you just can't influence the price in any material sense - the market for crude/oil is too large and too global for that.

I understand this argument and while it seems to have merit, it fails to pass a simple smell test. If the price of oil was driven by supply and demand fundamentals alone then we should be able to point to the fundamental changes that support a tripling in price over 18 months and then a 2/3 decline over 4 months. There is no rational fundamental explanation for this price action other than credit driven speculation.

My guess at the disconnect between the futures and cash market is that the futures market drove price expectations for the cash market. With demand for oil fairly inelastic in the short run, oil consumers simply had to pay the higher price.

 

[blenhardt]

"It also takes more 25% more crude to refine diesel than to refine a similar gallon of gasoline, he said. "As a result, as the price of crude increases, the spread of the cost of producing diesel versus gasoline also widens.""

ls99, I agree. It doesn't make sense to me. If that was true then, with the price of crude down, why isn't diesel spread from gas to diesel lower.? I believe the reason it stays high is because they can get it and no one is really raising a ruckus the way they do when gas is high.

 

[REWahoo]

Here's what Wikipedia has to say about USLD (Ultra-low sulfur diesel) refining costs:

"The transition to ULSD is not without substantial costs. The US Government has estimated that pump prices for diesel fuel will increase between $.05 and $.25 per gallon as a result of the transition. And, according to the American Petroleum Institute, the domestic refining industry invested over $8 Billion to comply with the new regulations."

Looks like the price at the pump is based mostly on whatever the market will bear, not added cost.

 

[chinaco]

Here is an analysis.

They say part of the price increase was the decline in the value of the USD (relative to other currencies).

Plus the uncertainty in the middle east (Iraq War) of supply disruption.

Crude Awakening: Behind the Surge in Oil Prices - Economic Letter, May 2008 - FRB Dallas

I think the suspicion of speculators driving up prices was that crude prices increased fairly rapidly over about 12 months but demand had no increased accordingly.

I am sure that there will be much more discussion on this topic. We are probably looking at some large regulatory changes in the next 12-18 months.

 

[soupcxan]

If the price of oil was driven by supply and demand fundamentals alone then we should be able to point to the fundamental changes that support a tripling in price over 18 months and then a 2/3 decline over 4 months. There is no rational fundamental explanation for this price action other than credit driven speculation.

The fundamental change in the market over that time was the superheated growth in BRIC economies as well as the assumption that said growth would continue at an accelerating pace. Now that economic forecasts for those regions have sharply decreased, so has the price. As I said, a small increase in demand from these countries could have a multiplied effect on the price because supply can't adjust quickly enough to catch up. It takes years to bring a new oil prospect or refinery online. Especially when you consider that oil is not just priced on the spot market but also on the futures market. So the futures price reflects expectations about future supply/demand imbalances. If you wake up one morning and realize that +2,000,000,000 people are in economies growing 10%/year, and they are starting to develop a taste for petroleum products similar to the USA, then obviously you will be willing to pay more to lock in a future supply of oil given its finite supply.

The value of the USD also plays a part, as chinaco pointed out.

 

[Gone4Good]

The fundamental change in the market over that time was the superheated growth in BRIC economies as well as the assumption that said growth would continue at an accelerating pace.

Yes, just like the "fundamentals" of the internet boom was the truth that bandwidth demand is theoretically unlimited. And the housing boom was predicated on the truth that the price of residential real estate had never declined by a significant amount on a nationwide basis.

Every bubble is predicated on some plausible investment rationale . . . but often times those rationale are invented after the fact, not only to explain why prices went up in the first place but to argue for why they will continue to go up forever.

This isn't the first time the world was running out of oil. Nor the first time that the bulls forgot to consider demand destruction. It was never clear to me how BRIC nations were going to support an ever increasing price for oil when the much wealthier developed economies (like the US) were starting to buckle under the pricing pressure. But that didn't stop Goldman "analysts" and others from repeatedly chasing market prices higher with upward revisions in their targets. Kind of reminded me of the Internet analysts changing valuation metrics to support ever increasing stock prices.

If you wake up one morning and realize that +2,000,000,000 people are in economies growing 10%/year, and they are starting to develop a taste for petroleum products similar to the USA, then obviously you will be willing to pay more to lock in a future supply of oil given its finite supply.

But that is precisely the point. The world didn't "wake up one day" in the middle of 2007 and discover that BRIC economies were growing. We knew that for a very long time. So what changed in 2007 that sent oil on a 300% tear? Nothing other than the fact that oil prices went up so pension funds, hedge funds, individual investors piled in. Then oil went up some more. Rinse. Repeat.

 

[chinaco]

A little more information on oil prices.

Our War and the Military has not helped. Running the Iraq war has driven up our consumption of oil. If marginal oil consumption contributes to higher prices (and it does). Then we caused par tof the problem.


Contributors to high oil prices:

- Increased world consumption ex US
- Increase US consumption (including the War).
- Weak USD driven in part to artificially stimulate the economy with low interest rates (and what it does for exports) and borrowing... partly politically driven (not just a bad impact on oil prices but contributed our economic demise)
- IMO: Speculation and seeking higher returns in commodities by non-oil consuming entities... contributed.

Any marginal increase in demand (or expectation of increased demand) will drive up prices.

The US military oil consumption | Energy Bulletin

 

[Gone4Good]

Our War and the Military has not helped. Running the Iraq war has driven up our consumption of oil. If marginal oil consumption contributes to higher prices (and it does). Then we caused par tof the problem.

But a war that started in March 2003 really doesn't explain a tripling of oil prices from Jan 2007 to June 2008 any better than BRIC growth does. And considering that the war continues to this day, it doesn't explain the 4 month 66% decline from ~June to Oct/Nov.

But a single more simple explanation accounts for both . . .

BUBBLE!

 

[youbet]

One thing that still bugs me, and I have heard no good explaination, is why diesel fuel is still about $1.00 higher than gasoline It takes less refining and is thus cheaper to produce? It was about $1.00 less than gas about a year or so ago

Because people are willing to pay $1.00 more......... Cost is but one factor in pricing.


Diesel has been more expensive than gas here in Illinois for many years, not just the one year you mention.

 

[chinaco]

But a war that started in March 2003 really doesn't explain a tripling of oil prices from Jan 2007 to June 2008 any better than BRIC growth does. And considering that the war continues to this day, it doesn't explain the 4 month 66% decline from ~June to Oct/Nov.

But a single more simple explanation accounts for both . . .

BUBBLE!

I think prices came closer to doubling in that period... $2 to $4/gal

I agree... the war and replenishing the strategic oil reserves was only one factor... but it increased consumption... according to DOE.

The weak USD was likely a bigger contributor.

I agree with your Bubble statement also... prices were driven up on anticipation of future increases in demand (and price increase).

 

[Gone4Good]

I think prices came closer to doubling in that period... $2 to $4/gal

Was referring to crude going from $50 / bbl to $147.

 

[chinaco]

Was referring to crude going from $50 / bbl to $147.

Oops. My mistake.

 

[jazz4cash]

One thing that still bugs me, and I have heard no good explaination, is why diesel fuel is still about $1.00 higher than gasoline It takes less refining and is thus cheaper to produce? It was about $1.00 less than gas about a year or so ago

I agree...this is the $64k question and the explanations offered earlier don't quite fit.

Diesel is generally priced very close to (but generally less than) unleaded regular in areas where there are large numbers of over-the-road trucks. In urban areas where the customer base may be primarily passenger cars (VW/ Mercedes) and light trucks, it may be closer to unleaded premium.

This recent era of diesel priced well above unleaded premium IS NOT unprecedented, however. I recall clearly right before the 2004 election cycle, diesel was much more than unleaded. I remember because I had just turned in a diesel powered light truck which was my company car for awhile. In 2004 leading up to the election, there was a huge drop in fuel pricing. Last July I predicted the drop in fuel prices leading upto the current election, expecting 2008 would mirror 2004. This does not explain the inversion of unleaded and diesel, but I just don't believe diesel would be priced above unleaded unless there is some form of unnatural market force involved.