<Well, it's another well, or is this Saturday already? The Oil Drum The ASPO plot>

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pjminton on September 11, 2005 - 3:55pm Permalink | Subthread | Comments top
My first post.  Question - The Futures Market, where this oil price escalation has taken place, actually bids to purchase a small fraction of all oil sold.  I believe something like 1% or less of all oil actually sold.  However, the entire energy market uses this highly speculative pricing to determine today's crude oil prices.  Correct me if I am wrong, but this is the same oil that was profitable at $20 to $30 a barrel when it was first extracted.  It is the same oil that a company like Shell (big oil) extracts, pipes, ships, refines, pipes again, trucks and sells all within their own domain - either companies they own outright or that their products drive a company's profitability.  So, ultimately the gasoline I purchase today at $3.04 per gallon from my local Shell station provides lots and lots of profit to Shell.  It is a product that is being sold at a seemingly obscene profit (based on it's original and continued costs).  Am I wrong in my fundamental thoughts (Futures Market's pricing influence, big oil's ownership or influence on all aspects of crude oil to final product production and sales, obscene profits).  Correct me if I am off base as I would like to use these points to foster discussion in my classroom.
 
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mw on September 11, 2005 - 4:38pm Permalink | Subthread | Parent | Comments top
Not all oil, as you point out, is sold via the futures market. Spot oil prices are influenced by the futures market as well as what the market will bear. Specific producers and regions set their oil prices somewhat independently of one another, and base price on factors other than the futures/spot prices in one region of the world, said factors including - quality and nature of the oil, who its being sold to (and how transported).

I see producers moving their prices up and down all the time.

Now, on to Shell and other integrateds - those that have their own supply to their own refineries certainly are in the position to maximize profits at every step of the way. However, when one looks at the raw crude production stats of the majors, they are producing less. Therefore if they are producing more finished products, they either dip into their own built up stores, or have to buy from other producers on the open market.

Upstream producers who aren't engaged in the business of refining get maximum exposure from price changes, which can be a good or a bad thing, depending on where price is headed and whether/how much price hedging they employ.

We can fully expect public outrage at oil companies and their profits but one thing is certain -- in an era of tight supply/demand, where exploration is running, in many parts of the world, at a record pace and costs therefore are as well -- without these big profits you'd see a reduction in exploration activity and, ultimately, even higher prices as supply tightens further, later down the road.

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