How High Will the Price of Oil Go? 54 comments
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Higher Oil Prices Are Caused By:
- A Weaker U.S. Dollar
- Competition from Alternative Transportation Fuels
- Supply: Opec's Production Quotas and the Inventory of Crude Oil
- Demand: The Pace of the Global Recovery
- Speculation and Hoarding
What Is a Realistic Price of a Barrel of Oil?
A barrel of oil is mainly valued for its conversion to gasoline and diesel. A refinery cracks a barrel of oil and it yields so many gallons of gasoline and so many gallons of diesel (depending on your cracking ratio). So the price of a barrel of oil is really the sum of the prices of its two main products.
Weaker U.S. Dollar.
A weaker U.S. dollar is a big driver in the price of oil. Oil is a global commodity that is priced in local currencies. Naturally, if the dollar crashes and loses 90% of its value, then oil prices would rise by a factor of 10. Therefore, the prices quoted in this article are using 2009 constant dollars.
Competition from Alternative Transportation Fuels
At the right price, oil has competition from synthetic equivalents. Coal is nearly unlimited and is a superb feedstock to create oil equivalents. A barrel of synthetic oil (syn diesel) is made using coal-to-gas then gas-to-liquids conversion. The same process can be done using natural gas as a feedstock and using gas-to-liquids conversion. If oil prices stayed high long enough, then a whole crop of syn diesel plants would spring up.
Supply: OPEC's Production Quotas and the Inventory of Crude Oil
Could oil (or oil equivalent) go to $200/bbl and stay there? Doubtful, as so many marginal producers would come on line (shale oil, tar sands) and demand would drop. Synthetic diesel (made from coal) would be very profitable with oil prices at a sustained $100 to $200/bbl. Even the Saudis wouldn't want $200/bbl because it would encourage other sources to permanently come on line.
The oil will run out, yes. Sure, in the distant future, the price for natural oil could go to $1000/bbl. That's when oil will be useful only for its rare complex hydrocarbons. The markets for natural, crude oil would be meaningless. They would have been supplanted by barrels of synthetic oil equivalents.
Demand: The Pace of the Global Recovery.
Could oil be $30/bbl (in 2009 dollars)? Not likely, as that exceeds most of the world's cost of production. This could happen only if a) there were a global collapse in demand, brought on by a much more severe global depression, and b) Saudi Arabia ran into serious cash flow problems and ran their spigots full blast.
The Saudis made it through the recent tough spell. They have a fat bankroll to last them thru lean times so they can reduce production when the price is low. The Saudis have built up their bankroll over the years by saving the money they made by exporting oil to us. Therefore oil has many natural (market forces) and man-made forces keeping it within a range.
Speculation and Hoarding
Even though oil has a natural price range, speculators can drive the price of oil. The proof of this is that the price of oil reached $147/bbl not too long ago. A year later, folks were worried that oil would drop below $45/bbl and stay there. Why were they worried? They should have been praying for such a miracle.
Getting Into Oil Futures
Consider the U.S. Oil Fund ETF (USO) and PowerShares DB Oil Fund (DBO) or their ilk. These funds hold only oil futures contracts. You can successfully win in oil speculation if you can predict a) the future level of the U.S. dollar, b) the pace of the global recovery (demand) and c) the actions of speculators and hoarders. Not an easy task.
Oil futures are highly speculative. For the prudent, risk-adverse investor looking to steadily grow his or her portfolio, there are far better ways to get oil exposure.
Buying Oil Producing Companies
Question: Should you buy oil?
Answer: Yes. Oil is a key sector of the global economy. Oil has far more upside potential than downside potential. After all, there is only so much oil left in the ground.
If you want to own some oil, the best way is to buy an oil major: Consider Exxon Mobil (XOM), British Petroleum (BP), Total (TOT), ENI Spa (E) and Royal Dutch Shell (RDS.A).
This list of dividend-paying oil majors is by no means exclusive, there are many more. All of these stocks pay a sizeable dividend, so you get paid to wait for the price of oil to recover. These large caps occupy significant places in the world's leading stock indexes. If you own an SP500 index fund, you already own some XOM. If you want to overweight oil, adding some of the oil majors is the way to go.
DISCLOSURE: Author is long BP and E. You should perform your own due diligence and consult with an investment advisor before investing.
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This article has 54 comments:
high quality syncrude from high-volatile illinois/west kentucky bituminous coal is always a possibility, but it takes 10 yrs to get an industry started & since we haven;t started yet it may already be too late.
> jack
Am just a beginner, any comments on this please?
Jim
As for speculation, speculators can do as they please, but their actions will have to be verified by players on the physical markets if they are to mean something. Of course, heavy betting by speculators on an oil price rise will hardly lead to producers increasing their drilling for oil, but speculators have lost the ability to push or to help push the price down.
On Jun 07 08:12 AM heball wrote:
> As for dividend seekers, in addition to heavy hitter Oil companies,
> tax free dividends in pipelines are lucrative, as well as Royal Trusts
> such as NRT.
Thanks for the info on SynCrude.
On Jun 07 08:41 AM john s. gordon wrote:
> you might mention colorado shale as a potential source of alternative
> transportation fuels. we don't have an industry yet (we almost had
> one in 1927) and there are constraints (water).
> high quality syncrude from high-volatile illinois/west kentucky bituminous
> coal is always a possibility, but it takes 10 yrs to get an industry
> started & since we haven;t started yet it may already be too
> late.
On Jun 07 09:13 AM velvet wrote:
> me myself am Long Linn Energy, PE 1.9 Yield 12.6 ROE 53.34.
> Am just a beginner, any comments on this please?
On Jun 07 09:58 AM Pearsonpc wrote:
> Enjoyed your article.
>
> Jim
> Some of this article is good, while some of it doesn't make any economic
> sense at all. These substitutes that the author talks about cannot
> compete with cheap oil, and the OPEC people have finally figured
> this out. President Jimmy Carter once figured this out too, which
> is why he said that his government was prepared to keep costly new
> energy intiatives from being undermined by cheap oil..
F E B -
I agree with you 100% that Oil Substitutes CANNOT compete with cheap oil. However, as my article states, if natural oil becomes expensive, then oil substitutes will become very competitive.
My article was not for nor against oil substitutes. My article was an academic discussion about the limits of the price range of natural oil, and how Oil Substitutes keep the price of crude oil in check.
I personally believe that oil will find the right level to aid the global recovery, and if higher or lower, than probably higher. The world is a lot bigger than a lot of American's realize. There is an ever increasing demand for the stuff outside of the USA's borders, more than enough to keep driving prices higher and higher. The Indians are now assembling lots of vehicles. And let's not forget the Chinese who now own a few old GM brands and have lots of cash to trade for the black gold. 33bbll. I don't think we will ever see that again.
On Jun 07 11:54 AM ScottEX wrote:
> Would it seem then that going forward should the speculators do their
> best to drive the oil price, won't then the Saudis open the spigots,
> knowing as they do now the degree to which they are coupled to the
> American's fate? Saudi bank roll though? Don't they own Citigroup?
> Is there any cash left there?
>
You are indeed correct. If the world price of oil was driven to $200 a bbl by speculators, the Saudi's would fully open the spigots. The Saudi's are very concerned about the price of oil in a defined range (not too cheap, not too expensive). Consistently, they have cut back on production when the price is too low and have increased production when the price is too high.
They will continue to do this until the oil starts running out (i.e. when they can't pump any more)
As for the Saudi's ability to cut prices: as I said in my article, they will do this as long as they have the bankroll.
If the Saudi's could make a risky bet on Citigroup during a severe liquidity shortage (no money available) then the Saudi's must have a large enough bankroll to see them thru thick and thin.
Saudi money is not AT Citibank. Their money is invested IN Citibank. And in a 1000 other places.
Repeated in comments----Pure Shill----step right up---I've got a deal for you!!! Puleeeze!
> Just a repeat of all the Graffiti on the wall--A waste of my time.
>
> Repeated in comments----Pure Shill----step right up---I've got a
> deal for you!!! Puleeeze!
FDNY RET - Please help me out. What am I shilling?
I appreciate you adding that fact as it supports my argument: as the price rises, newer "sources" of oil come on line, raise the supply of oil and cause the price to drop.
On Jun 07 03:46 PM berg wrote:
> Higher Oil Prices Are Caused by Low New Field Discovery Rate Also.
>
> Oil Industry ignores new exploration technologies (for example,BSE
> binaryseismoem.weebly.com ) to get real national field inventory.
> They do not need it, becouse for majors it is better a doubling oil
> price than doubling production. Oil industry prefers to be "treasure
> hunter" with low discovery success rate (25%) than ordinary manufacturing
> with high rate (75%). High rate allows to get good field inventory.
> Then good bye exploration romantic and connected bluff with it including
> prices manipulation.
> As a result, modern civilization is hostage of oil industry which
> tasted $147/bbl and wants nothing more. Therefore we will have resource
> shortage anyway. Supply shortage can be significantly mitigated with
> BSE technology which provides a threefold increase in oil field discoveries.
>
>
> A. Berg, Ph.D
> San Jacinto, California
I do like some energy MLP. My favorite has been ARLP. However, now that it is near $40, I don't see a lot of appreciation. So, I hold it and will write covered calls against it, but I won't invest more into it.
We do our taxes by hand. The cost of tax software would more than offset any income advantage of an MLP.
Disclosure: long BP
This energy cycle will repeat itself from now on so get use to it. When prices are high a recession starts, when prices are low we come out of the recession and on and on.
The extra tax tools you purchase. Would they be recovered under the tax code and become a deduction thus costing 0 ?
You can also call the IRS and they will help you over the phone to understand and how to report these gains.
MLPs I guess require a little more thinking and work at tax time but a 15% return seems worth the effort.
On Jun 07 05:56 PM epeon wrote:
> I agree. My favorite play for oil is BP because of its 7% dividend
> yield. I do not know when oil is going to spike again, but it will.
> In the meantime, I collect the dividend.
>
> I do like some energy MLP. My favorite has been ARLP. However,
> now that it is near $40, I don't see a lot of appreciation. So,
> I hold it and will write covered calls against it, but I won't invest
> more into it.
On Jun 07 08:50 PM Michael Fitzsimmons wrote:
> coal is a superb feedstock to create oil equivalents?? i will pull
> a john mcenroe: "you cannot be serious!" nothing can be "superb"
> if it destroys the environment. and i am not just talking CO2, i
> am talking about all the toxic heavy metal waste and particulates
> that comes along with coal. why on earth people want to take coal
> and make oil equivalents out of it when we can run transportation
> solutions on cleaner, cheaper, and abundant US natural gas reserves
> is simply beyond my comprehension.
On Jun 07 07:52 PM User 422955 wrote:
> I'm at the very beginning of understanding MLPs. For a small investor
> such as me, they have two big disadvantages. First, they send out
> their tax reports in March or even April. Second, the tax reporting
> they require is sufficiently complicated to require TurboTax or an
> equivalent. Taxes for MLP owners also involve more tax forms.<br/>
>
> We do our taxes by hand. The cost of tax software would more than
> offset any income advantage of an MLP.
>
> Disclosure: long BP
seekingalpha.com/artic...-
some-of-the-gains
For some reason, you can't post comments to the authors articles. If anyone would like to comment on the article here in this article, feel free to do so. First time I ever heard of an ETF as being a sham, perhaps this is due to the holding of futures, and the rolling of same, and this is a unique drawback to futures/derivatives based ETFs that doesnt occur in stock-based ETFs. I would be interested in others views on the subject of "sham Oil ETFs."
On Jun 07 10:05 PM Robert09 wrote:
> Hedge against the price of oil! Check out blattistics.com.
> You can build your own customized financial models allowing you to
> better manage portfolio risk and pick value stocks. You can even
> find a form of "Beta" and find out how vulnerable your portfolio
> to changes in the energy sector.
You may want to pull up your research on Linn Energy. They have a sound story and have locked in oil/gas prices through 2011 so their distribution is pretty stable through that period of time. Solid management team and solid assets with locked in prices make it a winner. Risk is probably dollar related.
BP is a great story.
Understand your thesis on why oil can't sustain really really high prices due to substitutes cutting the market and/or demand destruction. Fitz makes a great point regarding some of these substitutes like oil shales...they are nasty on the environment, take a lot of water and will require coorperation from government...all of which mean they won't happen for a while. I'd rather see us tap into natural gas as a fuel substitute either through direct usage (nat gas vehicles) or as a liquid (GTL) but GTL doesn't make sense until oil prices get really high AND nat gas feedstocks stay low. If oil prices are too low OR nat gas prices too high, GTL is a tough economic bet. Too many BTU's used to make not enough BTU's!!
You may want to follow Fitzsimmon's links to his website with his energy policy. He's got some great ideas. He and I differ dramatically on the political spectrum but he's on track with his ideas around energy. He's even coming around to my side of things a little bit regarding the Chosen One. He probably doesn't distrust Obamma as much as me, but he's seeing a lack of progress from him. We need a new energy policy, not a tax the oil/gas company policy. Fitz's is a good place to start.
I can understand your concerns that MLP's appear to be too good to be true. I have spend a lot of time performing due dilligence on some MLP's, and have owned one for a long time. There are obviously risks, and the corporate structure can be complicated. Here are a couple of risks that I see, and a response to why I like KMP.
1. The potential for poor corporate government and self serving executives among a complicated corporate structure. RESPONSE: Richard Kinder's only compensation is $1 and his ownership, not options, of the the KMP (the MLP) and KMR( the LLC that is the General Partner). His interest to create long-term shareholder value is 100% aligned with the MLP shareholders. The same could not be said of Marty Sullivan at AIG with respect to his shareholders for sure. There are a lot of things that could go wrong with KMP, but i feel the chances of extraordinarily poor results directly due to an issue of poor corporate governance is very miniscule.
2. KMP is "junk" rated, and there are concerns about its ability to refinance its termed debt and/ or finance new planned pipeline and storage projects. RESPONSE: True, a Kinder Morgan Partners bond issue is Baa2/ BBB (moody's/ S&P), which is on "junk". A Kinder Morgan Inc. Sr. secured note is Baa1/BB, which is lower medium grade/ junk. But who trusts the ratings agencies anyways? Argus (independent, investor-side research) has its financial strength at a "Medium-Low". (2nd lowest rank on 5 point scale). I agree with their assessment that KMP should have access to capital in 09 & 10, especially since Goldman Sachs is a General Partner. (I believe throught the LLC units). With a Debt/ Capital ratio of 61%, KMP is not risk-free. But I believe that that KMP provides a good long-term risk/ reward ratio, especially when one considers the 7.9% yield.
3. KMP could be vulnerable if demand if demand and prices of the underlying commodities drop dramatically. REPSONSE: there is a historical correlation between KMP's price movements and the underlyings. However, KMP is paid to move and store the stuff. If demand falls, their demand to move the stuff is somewhat hedged by the demand to store it. In theory, whether oil is $30 or $150 per barrel, KMP gets paid to move it. Bottom line: there are some correlations, but they are not as strong as one might think.
I could go on with a few more points, but that is enough for now.
Disclosure: I own KMP, but it is less than 3% of my portfolio.
On Jun 08 11:50 AM WayneS wrote:
> The only competition to the extremely cheap oil we enjoy is conservation,
> but no one is willing to go that route. We waste 25-40% of the auto
> fuel we buy.
On Jun 08 11:51 AM Mmarrkk wrote:
>
> Understand your thesis on why oil can't sustain really really high
> prices due to substitutes cutting the market and/or demand destruction.
> Fitz makes a great point regarding some of these substitutes like
> oil shales...they are nasty on the environment, take a lot of water
> and will require coorperation from government...all of which mean
> they won't happen for a while. I'd rather see us tap into natural
> gas as a fuel substitute either through direct usage (nat gas vehicles)
> or as a liquid (seekingalpha.com/symbo...) but GTL doesn't
> make sense until oil prices get really high AND nat gas feedstocks
> stay low. If oil prices are too low OR nat gas prices too high,
> GTL is a tough economic bet. Too many BTU's used to make not enough
> BTU's!!
>
> You may want to follow Fitzsimmon's links to his website with his
> energy policy. He's got some great ideas. He and I differ dramatically
> on the political spectrum but he's on track with his ideas around
> energy. He's even coming around to my side of things a little bit
> regarding the Chosen One. He probably doesn't distrust Obamma as
> much as me, but he's seeing a lack of progress from him. We need
> a new energy policy, not a tax the oil/gas company policy. Fitz's
> is a good place to start.
Oh, well if we are to all drive 40k Volts as mandated by Obama, where is the electricity coming from? Not nuclear, he is against that, too. How about a few new dams? I like it but I am sure the greenies would drown in sorrow. I , too, prefer natural gas which is abundant, can't seem to get a price above finding cost and is already used in transportation and electricity production .
But, Obama's crew seem to have eliminated it too, or it should have been well underway by now. All the alternate "solutions" to evil oil, coal, nuclear, and anything that has a drop of carbon in it, are not here, and will not be. natural gas has carbon.
Rich liberals can drive their Volts and not care where the electricity comes from. Greenies can ride their bikes in a snow storm with the spouse and a couple kids on the back and the rest of us can buy oil stocks of foreign firms and consider moving to Canada. Rather not be socialist, but if this is the new Russia,, then at least Canada has a national policy, oil, timber, water, farm land and other things needed to make a go of it.
The USA signed its death warrant last November. Start looking elsewhere for investments and a place to live.
On Jun 07 08:50 PM Michael Fitzsimmons wrote:
> coal is a superb feedstock to create oil equivalents?? i will pull
> a john mcenroe: "you cannot be serious!" nothing can be "superb"
> if it destroys the environment. and i am not just talking CO2, i
> am talking about all the toxic heavy metal waste and particulates
> that comes along with coal. why on earth people want to take coal
> and make oil equivalents out of it when we can run transportation
> solutions on cleaner, cheaper, and abundant US natural gas reserves
> is simply beyond my comprehension.
On Jun 08 12:28 PM realold wrote:
>
>
> Oh, well if we are to all drive 40k Volts as mandated by Obama, where
> is the electricity coming from? Not nuclear, he is against that,
> too. How about a few new dams? I like it but I am sure the greenies
> would drown in sorrow. I , too, prefer natural gas which is abundant,
> can't seem to get a price above finding cost and is already used
> in transportation and electricity production .
>
> But, Obama's crew seem to have eliminated it too, or it should have
> been well underway by now. All the alternate "solutions" to evil
> oil, coal, nuclear, and anything that has a drop of carbon in it,
> are not here, and will not be. natural gas has carbon.
>
> Rich liberals can drive their Volts and not care where the electricity
> comes from. Greenies can ride their bikes in a snow storm with the
> spouse and a couple kids on the back and the rest of us can buy oil
> stocks of foreign firms and consider moving to Canada. Rather not
> be socialist, but if this is the new Russia,, then at least Canada
> has a national policy, oil, timber, water, farm land and other things
> needed to make a go of it.
>
> The USA signed its death warrant last November. Start looking elsewhere
> for investments and a place to live.
>
> On Jun 07 08:50 PM Michael Fitzsimmons wrote:
Coal unfortunately will be part of our future because it is there and it's cheap (as long as mountaintop removal and stream dumping is legal), but it's the worst option environmentally.
Geothermal (for electric grid, EVs) is an overlooked opportunity - green power, available 24/7 (for certain parts of the country). California could have all the EVs they want if they expand geothermal. That frees up natural gas for long-haul transportation.
But oil itself has a limited lifespan as a transportation fuel. I think we've already seen the peak in production. OPEC couldn't increase production in the first half of 2008 because they were at max production. With $60/barrel in a recession, when the economy starts coming back the price of oil will increase even faster. $100/barrel will be the low end in 2010, and it only goes up from there, only tempered by its braking effect on the economic recovery.
> I'm not so optimistic about oil substitutes. They'll take years
> to come online, and any disruption (like a 6-month slump in oil prices)
> will likely derail investments & cause the process to start over
> again.
True, oil substitutes take a while to come online. When the price of oil get high and stays high, then oil substitutes will come online with a vengeance. That's why the majors have built up a large investment in tar sands
> Ethanol was going to be the savior, but people became fixated
> on corn, which is the worst source of ethanol.
Corn-based Ethanol is a disaster. It drives up food prices, and doesn't save on greenhouse gases. Corn-based Ethanol, IMHO is not serious an oil substitute.
> The $40K Chevy Volt is not the single face of our EV future. Many
> other companies (many small new ones, some new faces from China and
> elsewhere) are coming up with new innovative ideas for half the price
> of a Volt. The tricky part is getting past the safety crash test
> hurdles (several million dollars that a startup doesn't have), so
> more than a few are designed with 3 wheels to be classified as motorcycles.
> In 2011-2012 there will be a real change in options to the consumer,
> and the big car companies may never be the same, if they survive
> that long.
Thanks Nerfer
I am not impressed by the US's lineup of EV. All are expensive like the Volt. I don't know about China's EV offering. Still 20,000 seems like a lot of money for a vehicle that only goes a short distance. The Tata Nano is $2500 for the fully loaded Indian version. Let's say the world model, with airbags & western safety features costs $5000. That is an inefficient car with superb gas mileage. You could buy four of them for one China EV. Replace half the US Fleet, and US fleet gas mileage drops by a quarter.
So if we look for alternatives, say liquid gas, then where to begin to pick the right stock(s). Any ideas about that?
Any thoughts about OKS, EPD,PAA, WMB, or rather ATN??
Am a rookie, trying hard to do research, but man, what a job.
On Jun 09 12:46 PM Cousin A. wrote:
> I enjoyed the article along with the comments, and I especially enjoyed
> and appreciated the author's responses to many of the comments.
> Good job folks! Thanks.
As a result, I would have to invest a lot of my investable assets in an MLP to recover the cost of tax preparation software. No, such software is not deductible from our income tax. We take the generous senior citizen standard deduction. Since our qualifying dividends and long term capital gains are already taxed at 15% (Federal only), I don't understand what additional tax advantage there is to an MLP. Most of my stocks have high dividends; most of the rest are quite speculative.
As a person retired for just over 10 years, our primary assets are an annuity derived from compensation deferred over my working years and our house. We both also have social security and I have a modest pension based on my combined state civil service and my active duty military time. Btw, I worked and live in a state with rather low civil service salaries and with a well funded retirement system.
You state that oil is at 70 but it will go to 200, but in the meantime it will go to 50. As well you state that you like to keep your long position in oil, but you want to get out of oil now.
My article has nothing to do with speculating on the short term price of oil.
On Jun 10 11:11 AM Mad Hedge Fund Trader wrote:
> We're already in nosebleed territory. Get me out of oil! I love a
> core long position in this commodity (see madhedgefundtrader.com...),
> and expect it to hit $200 before I join the AARP. But we have really
> gone too far, too fast, and are seriously in overshoot territory.
> Industry traders have been taking advantage of the greatest contango
> of all time, buying the front month contract, taking delivery, keeping
> it in storage, and reselling it forward to reap returns of up to
> 50%. And that is without leverage! Clever analysts are resorting
> to Google Earth to spy on storage facilities via satellite. Non industry
> players have been buying it as a dollar replacement. Crude burns
> better than dollar bills. As a result, crude in storage has ballooned
> to record levels. All fine and good when the price is going up. But
> crude can’t stay this high once the sugar high that is sustaining
> the economy burns off. Better to bail now at $70 and buy it back
> at $50 once reality sets in. And for Heaven sakes, don’t try to get
> to clever by shorting the stuff!
Range doesn't concern me so much. Most people commute less than 40 miles a day, and electric vehicles easily go double that distance. Recharge conveniently at home for pennies per mile (but upfront costs are more significant, as you mention). Have a hybrid or rent a car for your long trips & save money overall.
Tata is also experimenting with making an electric version of their small car, or a car powered by compressed air (probably noisy to refill). But the Nano is just too small and too slow for common American tastes, a used small car would be more attractive.
Fuel-cell vehicles (hydrogen) are a complete boondoggle, at this time, IMO.
Some of the established manufacturer's EV plans:
www.bloomberg.com/apps...
In China, Chery is an automaker to watch (may actually partner with Chevy), they have a proposed $15K electric car. Some more about China's auto plans:
evworld.com/news.cfm?n...
Living4Dividends wrote:
"I am not impressed by the US's lineup of EV. All are expensive like the Volt. I don't know about China's EV offering. Still 20,000 seems like a lot of money for a vehicle that only goes a short distance. The Tata Nano is $2500 for the fully loaded Indian version. Let's say the world model, with airbags & western safety features costs $5000. That is an inefficient car with superb gas mileage. "
Still, I am pessimistic about the Electric Car.
Compressed Air? Very interesting. The "batteries" are very cheap.
On Jun 10 11:20 AM nerfer wrote:
> Thanks for the feedback.
> Range doesn't concern me so much. Most people commute less than
> 40 miles a day, and electric vehicles easily go double that distance.
> Recharge conveniently at home for pennies per mile (but upfront costs
> are more significant, as you mention). Have a hybrid or rent a car
> for your long trips & save money overall.
> Tata is also experimenting with making an electric version of their
> small car, or a car powered by compressed air (probably noisy to
> refill). But the Nano is just too small and too slow for common
> American tastes, a used small car would be more attractive.
> Fuel-cell vehicles (hydrogen) are a complete boondoggle, at this
> time, IMO.
>
> Some of the established manufacturer's EV plans:
> www.bloomberg.com/apps...;sid=aYZSpbVVJmto&...
>
> In China, Chery is an automaker to watch (may actually partner with
> Chevy), they have a proposed $15K electric car. Some more about
> China's auto plans:
> evworld.com/news.cfm?n...
>
> Living4Dividends wrote:
> "I am not impressed by the US's lineup of EV. All are expensive like
> the Volt. I don't know about China's EV offering. Still 20,000 seems
> like a lot of money for a vehicle that only goes a short distance.
> The Tata Nano is $2500 for the fully loaded Indian version. Let's
> say the world model, with airbags & western safety features costs
> $5000. That is an inefficient car with superb gas mileage. "
But I'm thinking of shorting oil soon. Upside looks too good to me.
On Jun 10 11:11 AM Mad Hedge Fund Trader wrote:
> We're already in nosebleed territory. Get me out of oil! I love a
> core long position in this commodity (see madhedgefundtrader.com...),
> and expect it to hit $200 before I join the AARP. But we have really
> gone too far, too fast, and are seriously in overshoot territory.
> Industry traders have been taking advantage of the greatest contango
> of all time, buying the front month contract, taking delivery, keeping
> it in storage, and reselling it forward to reap returns of up to
> 50%. And that is without leverage! Clever analysts are resorting
> to Google Earth to spy on storage facilities via satellite. Non industry
> players have been buying it as a dollar replacement. Crude burns
> better than dollar bills. As a result, crude in storage has ballooned
> to record levels. All fine and good when the price is going up. But
> crude can’t stay this high once the sugar high that is sustaining
> the economy burns off. Better to bail now at $70 and buy it back
> at $50 once reality sets in. And for Heaven sakes, don’t try to get
> to clever by shorting the stuff!
Maybe I missed it, but what is the break-even point (in $/bll) for producing syn-diesel? I'm sure it depends on production sources and methods.
I wish I knew the answer to your question (Brk Even Pt on Syncrude). Perhaps others can help out.
On Jun 10 04:43 PM Whitehawk wrote:
> Excellent article by the way - would like to see more articles like
> this on SA, and appreciate the author's active contributions. <br/>
>
> Maybe I missed it, but what is the break-even point (in $/bll) for
> producing syn-diesel? I'm sure it depends on production sources and
> methods.
I applaud how you can say this without batting an eyelash.
Read statoil's and chevron's earning reports. Cost of production even in the deepest ocean rigs are at US$8 per barrel. With SG&A and DD&E it is below US$30.
take the case of thunderhorse. The rig lifts 250,000 BOE a day. cost of operation is US$8 per barrel. The rig has magically been inflated to have cost US$5 billion from US$1 billion. Even at this overprice, they can recover this within 4 years at a price of US$30 per barrel of oil without SG&A and DD&A figured in. At US$50, they recover in 1.5 years.
Of course the accountants will figure a way of adding the cost of the toothpaste and toilet paper the CEO uses into the SG&A and DD&A. So the expenses will be inflated.
In fact Statoil has refused to go along with OPEC in limiting production. They are continuing thei shale projects and they have been purchasing assets in the Gulf despite a US$40 oil.
I dare the author to show me any financial report wherein Upstream operations have lost money at US$40 per barrel of oil
Of course some of us can go to bed knowing how billions have been screwed for the sake of the few shysters in WS.
On Jun 08 12:10 PM Living4Dividends wrote:
> I agree that Wayne S - If we only conserved, there would be cheaper
> oil, and our oil would last longer.
------------------- article 1 ----------------------...
Countries outside Opec not much help to the cartel
Financial Times (Ft.com)
March 4, 2009 3:55pm
by Javier Blas
Will low prices force non-Opec producers to shut their production and thereby involuntarily help Opec to stabilise the oil market in the short-term, bringing supply in line with falling demand?
Opec is continuing to appeal to non-member countries to reduce production ahead of its Vienna meeting late next week, but with current prices above $40 a barrel for Brent and West Texas Intermediate the answer appears to be a resounding ‘no’.
Deutsche Bank and Morgan Stanley’s research suggest that oil prices will need to drop below $30 a barrel for a relatively long period before non-Opec producers, even in high-cost provinces such as the oil sands in Canada or the North Sea, start shutting-in their output, joining “involuntarily” the cartel’s “voluntary” cuts.
Deutsche Bank has analysed global oil production cash cost using the consultants Wood Mackenzie’s extensive database, and concluded that “in the short term oil prices would likely have to fall to $20 a barrel and below before non-Opec was at risk of shutting-in a significant amount of production.” Deutsche Bank adds:
“On average the cash cost of extracting a barrel of oil in the mature and higher cost non-OPEC markets of Russia, the UK, Norway and Alaska is around $15 a barrel. As such it is significantly below the current oil price. Only in the Canadian oil sands do average cash costs of circa $28 a barrel approach the prevailing $35-40 WTI oil price.”
Meanwhile, Hussein Allidina, head of commodities research at Morgan Stanley, has visited recently Calgary, Canada’s oil capital, to assess whether producers in the high cost oil sands of Canada - potentially the first candidate to cut production - were likely to shut in production, as many expect. He reports that there is “little evidence of an imminent pull back in existing production from the basin as cash operating costs are below current futures prices.”
An analysis by Deutsche Bank of three different price scenarios supports this, finding that significant forced production losses emerge only after prices drop below $30 a barrel:
Oil production at risk in mature areas outside the US
Source: Deutsche Bank
Mr Allidina sees its findings in Canada reinforcing its view that oil prices will average at only $35 a barrel this year.
“The single largest concern voiced by clients surrounding our $35/bbl WTI 2009 average price forecast has been the supply response that such price would invoke from Canadian oil sands producers. To quell these concerns, we spent a few days at the beginning of the week meeting with producers in Calgary -considered to be the world’s marginal non-OPEC producers.
“We left Calgary reassured that Canada will not be helping to balance the oversupply we see in 2009, and instead is likely to further exacerbate the surplus weighing on the market.”
But there is a caveat - the impact analysed both by Deutsche Bank and Morgan Stanley refers to the short-term effect of low prices in production. The medium- and long-term impact with project cancellation and a curtailment in investment triggering far greater decline rates.
As Deutsche Bank acknowledges:
“With investment now falling, not least as the financial crisis impacts a far more significant independent sector, the downside risks to supply forecasts are increasing. This suggests that upside price risks (once demand recovers) are significant.
“The oil industry is cyclical. Supply and demand price elasticities are low and project lead times are long. Income price elasticity is high. As a result, we find price upturns can be swift and intense, and downturns brutal. Prices tend to rise higher and fall further than consensus expectations. It has been this way for 150 years, but it seems that each generation of analysts must learn this lesson again.”
------------- begin article 2 ----------------------
07 12 2008
The Marginal Cost Of Oil Production Currently, the price of oil is trading around the average operating cost, or “cash cost”, for the world’s major oil companies. The average cost for the most expensive new projects - known as the marginal cost of production - is about USD75-80 a barrel, according to analysts of London-based Bernstein Research.
“In the long run we continue to believe that oil and gas prices will trend up in line with the marginal cost of supply,” said Bernstein. “However, prices should continue to cycle between the cash cost at the bottom, USD45-50 a barrel, and the price of demand destruction, USD110-125 at the top.”
An economic slowdown will reduce the cost of new supply by cutting the price of steel, energy and rig hires, reversing some of the rise in production costs of the past 5 years.
--------------------- end article 2 -------------------------
Granted, the second article is a year old, but the cash cost of oil production should not have changed drastically.
What number is correct, 15? 20? 28? 30? 45-50?
On Jun 16 11:31 PM Federico wrote:
> re: Could oil be $30/bbl (in 2009 dollars)? Not likely, as that exceeds
> most of the world's cost of production.
>
> I applaud how you can say this without batting an eyelash.
>
> Read statoil's and chevron's earning reports. Cost of production
> even in the deepest ocean rigs are at US$8 per barrel. With SG&A
> and DD&E it is below US$30.
>
> take the case of thunderhorse. The rig lifts 250,000 BOE a day.
> cost of operation is US$8 per barrel. The rig has magically been
> inflated to have cost US$5 billion from US$1 billion. Even at this
> overprice, they can recover this within 4 years at a price of US$30
> per barrel of oil without SG&A and DD&A figured in. At US$50,
> they recover in 1.5 years.
>
> Of course the accountants will figure a way of adding the cost of
> the toothpaste and toilet paper the CEO uses into the SG&A and
> DD&A. So the expenses will be inflated.
>
> In fact Statoil has refused to go along with OPEC in limiting production.
> They are continuing thei shale projects and they have been purchasing
> assets in the Gulf despite a US$40 oil.
>
> I dare the author to show me any financial report wherein Upstream
> operations have lost money at US$40 per barrel of oil
>
> Of course some of us can go to bed knowing how billions have been
> screwed for the sake of the few shysters in WS.
Do you have average cash cost of the non-opec producers ?
You original gave costs of a particular well and a particular firm - this is not helpful because it was anecdotal. non-opec industry wide numbers, the average fot the industry are more illustrative.
So I can update the article in my blog and make it more accurate, can you post the average cash cost of the non-opec producers here?
People get taken in by this US$40 marginal cost to produce oil.
In 2000 while living in texas, lots of oil wells were restarted. When it seemed that the oil price would hold steady over Us$20, it became profitable to restart the wells. these were wells that produced oil at half of what most wells were producing at that time.
Read Statoil's and Chevron's quarterly reports for last year. you will be able to compute for the operating costs and costs including SG&A and DD&A.
Again, I will ask anyone to produce a report that saw negative operating costs for upstream operations at an oil price of US$30.
Your article said "Could oil be $30/bbl (in 2009 dollars)? Not likely, as that exceeds most of the world's cost of production.".
Yet the article you have just pasted (which by the way is the most honest i have read regarding oil costs of production) belis this:
“On average the cash cost of extracting a barrel of oil in the mature and higher cost non-OPEC markets of Russia, the UK, Norway and Alaska is around $15 a barrel. As such it is significantly below the current oil price. Only in the Canadian oil sands do average cash costs of circa $28 a barrel approach the prevailing $35-40 WTI oil price.”
You will never hear CNBC or the other business shows say this. All you heard from CNBC was that marginal costs were at US$40 per barrel. The only folks who benefit from these lies are the shysters of WS who have manipulated and continue to manipulate the oil market. Of course you will hear more of the likes of Bernstein. Marginal costs BS.
I thank you for the article you paste (a link would be nice). I suggest reading the quarterly reports rather than depending on self serving researchers.