> -----Original Message----- > From: brin-l-boun...@mccmedia.com [mailto:brin-l-boun...@mccmedia.com] On > Behalf Of xponentrob > Sent: Monday, January 12, 2009 7:47 PM > To: Killer Bs (David Brin et al) Discussion > Subject: Re: Scouted: U.S. to collapse in next two years? > > > Did you see 60 Minutes last night? Seems like there might be a little > fallout. >
I saw it on their website, and it fit my expectations for a 60 minutes story. They had a story line and they included interviews and facts that fit the story line into the show. Anything that detracted from telling a good story was eliminated from the show. They don't stay a highly rated show by including too many long boring chalkboard sessions. So, the primary thrust of their argument is that it is futures traders that determine the price of oil, not supply and demand. They pointed out that demand was falling as the price was reaching its height, and that supply and demand should indicate that it falls as demand falls. In a sense, that is true. It isn't just supply and demand, it's that and anticipated supply and demand in the future. That's why it's a futures market. And, like any other market, it can be prone to bubbles and panic. But, it's there for a reason. Using it, an airline company can buy futures for aviation fuel and oil companies can sell futures in crude oil. It's true that everyone wants to get in the act, so most of the transactions are not by folks who actually need to buy or sell the product, but folks who see a profit opportunity. And, for the most part, markets like this market or the stock market are efficient. That is to say that it's hard to find someone with a long term pattern of beating that outside the statistical norm. (e.g. there are enough brokers so that if they used coin flipping as their strategy, a good number would have beaten the market average performance in 10 out of the last 12 years). Warren Buffet looked to be the one exception to the rule, but that's even debatable. But, these folks don't operate in a vacuum. There is a fundamental reality that underlies the pricing: supply and demand. Back in '98, there was a significant excess of supply of crude oil. Everyone knew that. In that environment, futures prices were not going to go through the roof. Instead, they exaggerated the effect of supply and demand and fell below $10/barrel. So, lets get to July, 2008. We have, from EIA, the following information for supply and demand. Date Supply Demand 2004 83.10 82.41 2005 84.56 84.00 2006 84.54 84.98 07Q1 83.96 85.97 07Q2 84.21 84.97 07Q3 84.25 85.64 07Q4 85.30 87.00 08Q1 85.34 86.41 08Q2 85.66 85.24 08Q3 85.69 84.73 As 60 minutes pointed out, demand was falling in 2008 and supply had increased. But, what they didn't point out was the fact that this data was not available at that time. Only the data until Q1 of 2008 was available. We knew that the US demand was dropping, but between 2004 and 2007, it had dropped 2.8%, while the total demand (including the US) increased by 1.7%. With all the talk of peak oil, and China's and India's economies booming, one can understand why such a bubble was in place. Most folks in the oil patch didn't count on such a bubble lasting. Big oil companies wouldn't approve projects that were profitable at $150/barrel, but required them to be profitable at, roughly, half of this. But, that was also true back in 2002, when prices were > $30/barrel....companies would require profitability at under $20 barrel. And then, the bubble burst with the financial crisis. As the world went into recession, demand slacked, and prices fell through the floor. There was a market panic. But, it was based in the reality that the OPEC cuts didn't happen as fast as the demand drop and the fact that tankers are sitting out there floating with tens of millions of barrels waiting until prices go back up to dock. So, speculation does effect prices. But, in the long run, the fundamentals of supply and demand either end panics or burst bubbles. In a sense, markets exaggerate the normal market forces. Finally, to get to the villains of 60 minutes: the speculators, we see that a lot of them lost their shirts. If you look at the sales and prices for Feb 09 crude oil you see that a lot of speculators bought these futures at >$140/barrel. They are about to expire at under $40. Speculating on commodities futures can make you millions. But, for every speculator who made a fortune in oil in the last year, there is one who lost a fortune. But, that's a boring story, and wouldn't get CBS the ratings they needed. I'd argue that futures markets are the worst way to sell commodities, except for all the other ways that have been tried, of course. :-) Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
