OIL PRICE DISCUSSIONS
If you want to appeal to old men and women, young voters, and young mothers caring for children, you had better look amiable and friendly.
And, if you want to appeal to a constellation of influential people here and there, you have to pick up the theme, “oil prices.”
You look amiable; so I speak the oil-price truth.
SECTION I: Mr. Krugman vs. Japanese Economists
There have been humble discussions among Japanese economists about the recent oil price surge or a paper Mr. Paul Krugman wrote on June 24, 2008.
Figure 1 shows that relationship. It also shows the cost of holding oil in storage, which consists both of the rent on the tank, or whatever, and the interest foregone by tying up wealth in physical commodities. (Yes, the independent variable is on the Y-axis. There’s a reason for that.)
…First, the point I’ve emphasized a lot: because of the excess flow supply, somebody must be accumulating inventory.
But the second signature is probably just as important: for this kind of situation to occur, the future and spot markets have to be in “contango”: futures price above spot, sufficiently so to make storage worthwhile.
What if that’s not true? Then the market looks like Figure 3:
Here the spot price, again indicated by the dotted line, is determined by flow supply and demand. Inventories aren’t growing, and the futures market is characterized either by “backwardation” – futures price below spot – or by a contango too weak to make storage profitable.
And here’s the thing: the actual data we have on crude oil don’t show the signatures of a market driven by speculative demand. Inventory data don’t show a big accumulation; and the market has mostly been in backwardation, not contango. It made news when, late last month, a slight contango developed – because until then there had been backwardation…
The price of oils is decided in two ways, according to discussions.
1) Present price (P) based on supply-demand relationship
2) Expected price (PF) based on interest rate plus storage costs
PF = P * ( 1 + [interest rate] + [stock costs])
( http://d.hatena.ne.jp/econ-econome/20080625/p2 )
To understand the sharp rise or the high-level of the oil price, the concept "interest rate" should include a "risk premium."
If the "interest rate" including a risk premium is minus, the right hand side of the above equation has no real effect.
(It is Euforia that works here. Interest rate has no meaning. People going for bubble feeling high and neglecting danger.)
Then, PF itself decides the price P, according to a Japanese economist; thus you need other chart indicating speculatively expected profits vs. prices over the domain of real supply/demand or overhead costs.
(With future price F: F = P * (1 - [interest rate] - [stock costs])
The Japanese economist is right in finding importance of interpreting a factor flexibly in an equation in an economic model.
It simply means that economists should not be arrogant thinking that they have got all the necessary factors and they knew all the necessary behaviors of each factor.
(I have my own theory on economic modeling taking into consideration arrogance of economists...)
SECTION II: THE MANILA TIMES
I am extremely sorry for a recent big accident at sea of the Philippines that took 800 lives.
So, I will take up an analysis in The Manila Times on the steep hike of oil prices.
The main reason for the recent rise it seems is speculation. There is widespread belief that crude oil supplies, while adequate at the moment, won’t be enough for the future…
A second reason is the huge appetite for crude oil by China and India, two of the world’s fastest growing economies. In 20 years, they will dominate the world, economically…
A third factor for rising oil prices is the massive shift of investment dollars into commodities such as precious metals, grains and petroleum, which are a hedge against the declining dollar.http://www.manilatimes.net/national/2008/may/31/yehey/opinion/20080531opi5.html
US Sen. Joe Lieberman estimates that the value of investment funds tracking oil and other raw materials has risen from $13 billion to $260 billion in the past five years. He calls these funds "index speculators."
A fourth factor is the weak US dollar...
Everything above stated is reasonable.
The Manila Times seems to be more useful than discussions by economists.
SECTION III: THE "BUSH'S WAR"
There is an old Japanese journalist who has recently seldom made a TV appearance due to a suspected common policy of Japanese TV stations to shun him for his anti-government stance.
But, he clearly stated that the recent higher oil price is a result from the War on Terror or the "Bush's War."
( http://www.pluto.dti.ne.jp/~mor97512/C04391.HTML )
I think his claim is quite right.
His assertion can be extended to include the "risk premium" and “speculation” that the Bush Administration is adhering to the current occupation of Iraq and the future occupation of Iran crude oil reserves are getting scarce in the world.
Indeed, you have to sometimes listen to a veteran journalist, if he is so anti-ruling parties.
(In the coming G8 Summit in Hokkaido, Japan, I hope that President Mr. George W. Bush will declare that he will immediately start withdrawal of US troops from Iraq and Afghanistan in order to launch the War on Oil Prices.)
If foreign oil companies provide money and technical know-how in deals more ambitious than those now being negotiated, Iraq realistically could pump an extra 3.5 million barrels per day into the global oil market within two to three years, says Wayne Kelley, director of RSK, an oil consulting company that has studied Iraq's oil sector for clients including the U.S. and Iraqi governments.
Such an increase would more than double Iraq's current oil output — and add nearly 4% to the global supply. "That becomes a very significant amount that would help alleviate gas and energy prices," Kelley says. "Iraq truly has that capacity."http://www.usatoday.com/money/industries/energy/2008-06-19-Iraqoil_N.htm ]
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That is all for today.
But, in a conventional argument, Japan has been responsible for oil prices as with the U.S.
"Moreover, there are at least two very large actors in this play who actually (and actively) stockpile oil in periods of RISING prices, further contributing to price hikes. They are the U.S. government and the Japanese government."http://answers.yahoo.com/question/index?qid=20070424095450AATctnQ
[APPENDIX in 2011.
Here a supplement is provided in November, 2011.
If the CEO of Exxon thinks it should be between $60-$70 per barrel, that means that it should probably be closer to $30-$40 per barrel. Exxon simply has too much vested interest in inflated oil prices to give an honest answer to this question.
To find what the reasonable oil price should actually be we need to look to the past, before speculators took control of the price curve.
(And, remember that my heart is always bluer than crude oil.
Mat 25:3 They that were foolish took their lamps, and took no oil with them:
Mat 25:4 But the wise took oil in their vessels with their lamps.
Mat 25:5 While the bridegroom tarried, they all slumbered and slept.
Mat 25:6 And at midnight there was a cry made, Behold, the bridegroom cometh; go ye out to meet him.
Mat 25:7 Then all those virgins arose, and trimmed their lamps.
Mat 25:8 And the foolish said unto the wise, Give us of your oil; for our lamps are gone out.
Mat 25:9 But the wise answered, saying, Not so; lest there be not enough for us and you: but go ye rather to them that sell, and buy for yourselves.
Mat 25:10 And while they went to buy, the bridegroom came; and they that were ready went in with him to the marriage: and the door was shut.
Mat 25:11 Afterward came also the other virgins, saying, Lord, Lord, open to us.
Mat 25:12 But he answered and said, Verily I say unto you, I know you not.
Mat 25:13 Watch therefore, for ye know neither the day nor the hour wherein the Son of man cometh.