----- Original Message ----- From: "Alex Gogan" <[EMAIL PROTECTED]> To: "Killer Bs Discussion" <[email protected]> Sent: Tuesday, September 13, 2005 5:40 AM Subject: Free Markets good but left un checekd they are evil
>I am a great believer in the Free Market, that over time it finds a balance like water (excuse the adage at >this time), but water always finds its own level. But now I am looking at the world and how dark and >dangerous this place can be (forgetting natural disasters) and most of the danger I think is due to the >"unchecked free market". While I agree that markets are not perfect, that they often have significant volitility in them, there is an obvious question here: who provides a check to the market? Also, the oil market is one I've been following for over 20 years, since I'm in the business. Your description of the sources of the volitility is inconsistant with what I know about the market....and that's something I'm interested in adressing. The volitility can best be attributed to a combination of time constants and the ratio of fixed to variable costs, I believe. The time it takes a new field to come online is several years. Oil companies need to guess what the prices will be when the field comes on line. Back in the late '70s, people were predicting that oil prices would continue to rise until they were in the $75 dollar range (in 1980 $s, which would be closer to $125 in 2005 $s). The oil business went full out, and many companies lost a lot of money in the busts of '82, and especially the bust of '86. The second bust was so bad, 50% layoffs were the norm. Houston was hit so hard that virtually new 2000 sq. ft (about 200 sq. meter) houses were selling for about $30,000. And, these were in good neighborhoods. Friends of ours let their crackerbox house in a declining part of town be foreclosed on, bought their dream house in a fancy part of town before this happened, and lowered their housing costs. After that, oil companies were very conservative in developing new fields. When the bust of '99 hit, and prices went to lows not seen since the Great Depression, there was another 50% or so layoff in the oil 'bidness. When prices recovered, they weren't trusted. For example, even after prices recovered to the low $20s, Shell insisted that any new projects be ecconomically justified with oil prices at $12/barrel. Natural gas was even worse. Gas prices had been depressed for a decade. They were bad enough so that wells that showed a natural gas play were shut in because completing them for production was not ecconomically viable. People were skeptical about the permanance of the higher natural gas prices, and were thus reluctant to go full out completing natural gas wells. Given this viewpoint, which is very understandable, production has been fairly inelastic with respect to prices. As a result, production capacity have not increased significantly as the prices rose over the past 6 years or so. Rig utalization, and the rates charged for rigs, have only hit the boom phase in the past few months. It will take a while for this to be reflected in increased production. In addition, even though energy prices have increased significantly from '99 to the spring of '05, demand continuted to increase at a significant rate. We are now seeing a slowdown in the increase, but we have yet to see indication of a reduction in world demand. This is also understandable, since energy costs represent only a fraction of the GDP of the US and world ecconomy (roughly half of what they were in the '70s). As a result of the relative inelasticity of supply and demand, relatively small inbalances in supply and demand will result in fairly large swings in cost. The obvious candidate for introducing stability is OPEC. And, they had a plan to do so...decreasing production when prices fall below their target price range and increasing it when prices rise above the range. With cheating on quotas as rampant as it is, they had minimal impact on the market. (The lack of sensitivity of their production to price is a reflection of their low variable cost of production). >Now when we are used to this excuse for the price of oil reaching the next land mark you would think, ok >this is the top price so it should stabilise and then the market forces should started to put a downward >pressure on the price, but then King Fahd died and this was the cause of anther 10% increase, but I am >sorry the man was very old this would have already been factored in the price. What is wrong with the viewpoint that the narrow difference between demand and the maximum production capacity makes the market skittish about any news that might hint at a tightening of supply? This hypothesis fits all the data. >Now in the last 7 years the price of crude oil has increased 700% or put it another way the price has >doubled each year. Huh? If the price of something is, say, $10 dollars, and it then doubles every year for 7 years, the price will be $1280 after 7 years, an increase of 12700% (The first two years there was very little difference it only increased by 130%) A 130% increase every two years would result in a 1745% increase over 7 years. >The House of Bush, first cousins of the house of Saud. Ok so what the price of crude oil has increased by >700% we are using more oil, the normal Joe and Joanne are consuming masses amounts of oil. Well Joe >and Joanne are not, the increase in demand is not anywhere near 700%. With all due respect, the view of the relationship between demand and cost given above is not only inconsistant with mainstream ecconomic theory, it is inconsistant with an overwhelming amount of data. >This is where we need the governments of the world to actually do something to stop the oil speculation >and put some controls in place, if not I fear that in a few years we will be looking back at the bygone days >when tech and oil was for all, but only the super rich will be able to afford it and the world could spiral >down into almost anarchy for the masses Are you suggesting that an international coalition invade oil producing countries so it can control the price of oil? If not, how would governments control the price? Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
