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Old 04-20-2009, 08:09 AM   #71
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"4.) (Question).... So for you guys that know....WHAT is the worth (ie., value in U.S. Dollars) of THAT SINGLE BARREL of crude at this point???? "

Easy, Supply/Demand + market manipulation by OPEC and EPA and politicians.

Consider. The oil field is found and a big oil company wants to develop it.

1- EPA, and Greenpeace file 200-1000 suits, each guaranteed to cost thousands of $$ to defend and take years to resolve.

or
2- A group of politicians BAN production in that area.

Are you aware we have known oil reserves equal to the amount of oil we have used historically and within the borders of the US? And we can drill for much less than 5% or so.
And to answer your previous question of me. I don't understand all of the economic factors either but I do understand basics as you seem to.

But, without accusing you of this, I do NOT jump to conclusions and blame the president for personally raising prices to line his pockets or the like as we have seen/heard for the last 3 + years.

I am sure anyone who has travelled in oil pumping areas have seen a working pump with cattle grazing within a few feet. That's how dangerous these horrible things are.
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Old 04-21-2009, 07:09 AM   #72
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So.....ANYONE else? What is the "snapshot", "point in time" value of this representative barrel of crude as it hits the sunlight and JUST as it enters and BEFORE it's affected by the world economic environment??? ANYONE??? If we're going to understand "commodity economics", this is a starting place....eh?
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Old 04-21-2009, 07:38 AM   #73
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This value is very hard to determine as the cost of production varies so much. In some areas new wells just spurt the oil to the surface under their own pressure and can produce 5,000 bbls a day. In other areas, 75 gallons of water must be introduced as steam to force up a bbls of crude oil. Usually a oil field starts out as the former and degrades to the latte. Crude oil frequently has dissolved natural gas in it. When it reaches the surface, the pressure is reduced and it bubbles off. Some oil field capture it and sell it. Many others just flame it off and the value is lost. Prudo Bay’s production is only about 40 % as much as it was in the 1960,s, which is why ANWR makes so much sense as there is way excess capacity in the existing pipeline only 75 miles away. Much of the nationalized oil rigs have not been kept up and are pumping at reduced rates with lots of down time. The huge, huge amounts of shale oil located in 3 Western states has a production cost requiring $60 a bbl to bring up. Research into better and cheaper ways to produce it is now off limits due to congressional decree. All of these various sources of oil have approximately the same “value” when they are produced. Much of the “easy” to produce oil is what has been placed “off limits” by congress. Back when I first got interested in oil, America was king in the oil business. Now Exxon, our largest is number 14 in size in the world. I have seen the term free market and similar used in this thread. Unfortunately the free market is nowhere to be seen in the oil market in this country anymore. When the government states running things, efficiencies go down and cost go up. Supply and demand is a natural law and it works. These artificial barriers to it, have caused lots of problems to the system. Unfortunately coal is right at the door of this happening.
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Old 04-21-2009, 07:53 AM   #74
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One aspect that has to factor into the equation is the cost of that barrel of crude. This is made up of the amortized field exploration and development costs, the direct lifting cost, royalties, taxes, setasides for future well maintenance and workover, etc. that must be paid/accounted for. If the present value of the barrel of crude isn't higher than the cost, then the well is uneconomic and will be shut in, temporarily or permanently.

I don't know how one can divorce the value of a barrel of crude from the world economic environment any more than one can divorce the value of a bushel of wheat or a pound of beef on the hoof from the economic environment. In other words, unless the producer of the commodity plans on using/consuming it himself, each is worth what someone else (i.e., the market) is willing to pay for it. That's why farmers and ranchers watch the Chicago Board of Trade for daily crop and livestock (commodity) prices which eventually trickle down to his local grain elevator or livestock auction yard. It's sorta like asking, "What's the value of my RV?" - at the end of the day, it's worth what someone is willing to pay you for it.

In actuality, an unrefined barrel of crude oil isn't worth much of anything in and of itself - what would one do with it? Rather, its worth is as a feedstock for production of other products such as fuels, lubricants, plastics, etc. If the producer is, let's say, a national oil company such as Petroleos de Venezuela S.A (PdVSA), then to acquire that barrel of crude oil as feedstock for their Baytown, TX refinery, ExxonMobil will pay either the long-term contracted price they may have in place for that barrel of crude, or they will pay the spot price that PdVSA could sell the barrel of crude for to another customer (ref. NYMEX). ExxonMobil will then have to transport the crude oil from Maracaibo, Venezuela to Baytown, TX, paying any associated costs, taxes, duties, etc., so that factors into the value of that barrel of crude oil as it hits the refinery fence.

I don't know if this addresses what you're looking for - if not, post up and let's try again.

Rusty
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Old 04-21-2009, 10:29 AM   #75
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Great post, Rusty. I always learn a lot from the way that you present the information.

Pardon me, but isn't the approach that you described more the way that it is supposed to work than the way that it actually works? Here is why I ask the question that way. It was my understanding that it was the spot rate that was driving the run up last year. Because of the perceived shortfall between the oil produced and the amount of oil being purchased, the price escalated. In that scenario, individuals and organizations who would never use a single barrel of oil for any purpose were buying the futures in the market. Thus, it wasn't the actual use of oil or the willingness of any consumer to buy it but the fact that speculators had their fingers in the process, essentially buying futures and taking large amounts of oil "off the market it" (because they bought the rights to buy it at some future date). The actual customers of the oil were forced to pay higher and higher prices, with the speculators reselling their future delivery dates at an enormous profit.

What should have followed is that when the actual crash came, those who had bought the futures should have been seriously affected. They agreed to buy future oil at the price inflated by the expected demand but now the demand, because of the almost instant recession, was going to be perhaps half of price that was anticipated. Since the speculators were not consumers of the oil and would have to sell the future dates to an entity that would actually take delivery, they should have lost their shirts. Yet, there have been no stories about such situations.

How is it that the market can be manipulated like this without those manipulating it getting taken to the cleaners when they get caught in a downturn? What part of this aren't I understanding?

Thanks,

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Old 04-21-2009, 11:40 AM   #76
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Charlie,

That's why I provided links to Bloomberg at least twice in this thread so far. Spot and futures prices are indeed determined by the markets (such as NYMEX), and if a trader had a long term futures contract to buy oil at $140/bbl, s/he indeed would have taken a bath with plunging oil prices unless s/he could have unloaded the contract at a deep discount. If a trader wants to go long, s/he has to find someone willing to go short before they can flange up a contract, right? Both of them can't be right. Just like selling/buying a share of stock - the seller's betting that it's going to drop, and the buyer is betting that it's going to go up.

A long way to say that speculation played a significant role in what happened to crude and refined product prices, both up and down - but the same thing happens with commodity traders dealing in wheat, soybeans, beef, etc. at the Chicago Board of Trade.

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Old 04-22-2009, 08:10 AM   #77
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Rusty, Lindsay & Charlie:

You ALL are providing one FABULOUS discussion regarding factors affecting the "pump price" of fuel. Thank you so very much.

Lindsay's explanation of some of the variables affecting exploration and oil field production were wonderful and on target. Rusty then connected the exploration, development, and lifting costs to a producer's decision whether or not that producer found it profitable enough to bring that hypothetical barrel of crude to the surface........and, Rusty, I do know we can't divorce the value of this barrel of crude from the world economic environment. However, for purposes of clarifying, and perhaps simplifying, what is generally a VERY confusing convergence of elements in this discussion so that the discussiion might be better understood by us less knowledgeable folks filling our rigs next to a Flying 'J' fuel pump, I'm attempting to follow a single barrel of crude from the depths of the earth into our fuel tanks.

So....as Rusty so adroitly explained, the worth of our hypothetical barrel of "feedstock" crude as it hits the sunlight, (not withstanding the "long-term contracted price," or the futures issues yet, rather, for the purpose of this discussion, the "SPOT" price), .......maybe,... is a figure that CAN be determined???? Is this correct??

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Old 04-22-2009, 08:35 AM   #78
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For those who have the time and desire to understand the technical basics of this subject, here are some worthwhile presentations:

HOW OIL DRILLING WORKS

HOW OIL REFINING WORKS

HOW GASOLINE (AND DIESEL FUEL) WORKS

The following is a little dated but worth a read as an overview of the commercial trail from reservoir to service station fuel pump.

UNDERSTANDING TODAY'S CRUDE OIL AND PRODUCT MARKETS

Here's another interesting link:

HOW GAS(OLINE) PRICES WORK

Rusty
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Old 04-22-2009, 10:06 AM   #79
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WOW now that is the stuff we need to help us understand all the other posts.
Now with all the hits this thread is getting I only hope that there is a good following and they also get to read what RustyJC posted.
I for one will go back over those 4 sites, as I really want to understand the whole progress of oil from ground to engine.
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Old 04-22-2009, 04:49 PM   #80
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I heard today that Florida (my state) had just approved a bill that would permit oil and natural gas drilling from 3 miles to 10.3 miles offshore. It would fairly soon employ 16,000 people with an average salary of $76,000 each. The talk is that it could supply billions of dollars a year and eventually supply as much as 20% of the state budget like LA. Evidently, the US Congress put all of the offshore drilling except for off of TX, LA, MI, and AL off limits., but the area Florida is looking at is 100% under the control of the states and we would get 100% of the revenue unlike beyond 10.3 miles where the states get 0 royalties. That 10.3 miles is an odd figure, but was repeated several times. Donít know where they got it. The drilling rigs would be from ships and visible for 100 to 160 days and then everything is underwater. They can slant drill up to 7 miles and can have dozens of wells coming to one pumping rig 10 miles offshore to be loaded onto tankers to be tanken to existing refineries that are presently handling foreign crude. The chances of spill are minimal although the environmentalist are already screaming. I was thrilled to see this process start. It will be a long process and the environmentalist will be suing and suing trying o delay. Russia and China are already setting up to start drilling in the Gulf. This is a very good development.
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Old 04-22-2009, 04:51 PM   #81
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Rusty, that's great stuff. I've read a couple of links already and plan to read more.

But I still don't think that it tells the whole story. For example, the government mandates for Ultra Low Sulfur Diesel have had an effect on the price. The real question is how much was the effect of the change, i.e. the costs of the additional refining that had to take place and how much was simply an opportunity to point to the government as the cause of the price increase. So did the governmental requirement for the gasoline additive - which promptly went in shorter supply than was needed for the refineries to process the quantities that they needed to, lower available quantities and driving up the prices. So too, I believe that there is financial manipulation in the spot market. There are too many countries with state run oil companies, several large private companies like ExxonMobil and a bunch of billionaire types that have deep enough pockets to cause significant volatility in the market if they choose to introduce it. I believe that the stock markets have been manipulated in this fashion for years and cannot accept that isn't some level of similar manipulation in oil pricing. I agree that the market itself will dictate prices in the long run but the timing of last year's run up was way too convienient to be pure market dynamics. Just call me paranoid.
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Old 04-22-2009, 06:13 PM   #82
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Quote:
Originally Posted by chasfm11 View Post
Just call me paranoid.
Charlie,

I really don't know how to respond to your post other than to say that I sat in meetings with ExxonMobil personnel last year when prices were skyrocketing. They foresaw exactly what was coming - the high prices stifled demand which led to a crash in crude oil and refined product prices. This was nothing new - we saw the same thing as recently as the late 1990s when a recession in the Far East cut global demand and led to crude oil prices falling to almost $10/bbl. As I stated earlier, the majors would much rather see stable $80/bbl oil than the roller-coaster feast-and-famine ride we've seen over the last year, but such has not been the history of the highly cyclical oil business that I've been involved with for over 60 years. I can remember sitting at home in a pipeline station camp 18 miles outside Truscott, TX in 1958 worrying whether or not my dad (an Humble Pipe Line Company employee) was going to survive the layoff that took out everyone with 10 years seniority or less - yes, he made it through. Although I've never missed a payday in my 35+ years with my current employer (knock on wood), it's no fun struggling to find qualified people to hire during the booms only to have to lay them off a few years later during the busts.

If you choose to believe otherwise, I guess there's not much more that I can say.

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Old 04-23-2009, 07:43 AM   #83
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Rusty: Thank you so much for the links you provided. I've read some, and I'll be reading and digesting for awhile.

Once again, at least from my perspective, this information is an example of the difference between knowledgeable understanding about a subject (in this case petroleum markets) and, uninformed fear, feelings, and emotions about that subject.

For the quintessential consumer in our American society, I'm concerned that for the greater and growing number of these folks, fear, feelings and emotions are adversely impacting and insidiously eroding the "social contract" we have with each other.

What I mean is, that IF John Q Consumer could or WOULD learn about issues affecting him, (like this cost of fuel issue) there would be a much greater degree of TRUST and CONFIDENCE between consumers and the producers, manufacturers, providers, etc. who bring products to these consumers.

As is appears to be now, that Trust/Confidence gap is widening and the social contract we have with each other is in jeopardy!! This widening gap is resulting from a number of reasons, but, the most SINISTER reason is that the Trust/Confidence gap is being widened and exploited by social parasites seeking monetary gain, politcal power, etc.

So, what's the connection between knowledge & understanding (about a subject), and the erosion of consumer trust and confidence??? If we (ALL consumers) don't (or won't) take the time and effort to get to the bottom of topics that affect us and are of interest to us, then, we (ALL consumers) are very very vulnerable to that sinister exploitation by social saprophytes.

Oooooops, sorry for the rant, BUT DANG IT....this is IMPORTANT!!
Or.....not. Steve
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Old 04-23-2009, 08:24 AM   #84
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Rusty, I'm not doubting a thing that you've said or a reference that you've provided. I know that the oil market has been volatile for a long time. Let me see if I can come at this a different way, with some different questions for you.

- does Cap and trade have an effect on the oil price today? In the stock markets, the claim is that the market looks out 6 months so that the prices today are a reflection of where the traders believe things will go in that 6 month period. How is the commodity trading "window" different than that stock market period?
- what was the "trigger" for the start of the oil run price run up last year? I fully understand that once the movement started, there was some "piling on", with the commodity traders feeding on themselves with the prospects of a production shortfall versus demand.
- during the runup, which portions of the entire drilling, refining and distribution processes that your references describe were the biggest benefactors of the higher prices? Which of those biggest benefactors were also significant participants (from a volume perspective) in the commodity trading purchases during that same period?
- agreeing the ExxonMobil knew that a crash was coming because the crude price was spiraling too high, what defensive measures were being taken by them to deal with that inevitable crash? Where those measures unilateral in concept and execution? If not, what level of cooperation and with what other entitities were those defensive measures invoked? What impact did they have on the total crude marketplace?
- within the entire oil community, knowledge of the extreme Green movement types and their influence on US governmental policy must exist. I'm assuming that there is a significant oil industry lobbying effort, which largely appears to have failed over the past 20 years to counter that Green movement (result: no new refinieries and most of the US oil drilling opportunites are off limits.) The goal of the some of Green types is to drive the price of gas at the pump to $8 per gallon to stifle demand. How much influence does the results of the Green movement was directly reflected into last year's oil price? I appreciate that Cap and trade is one of the programs that the Green movement is pushing but this question is more about their residual influence than about that specific program.
- The Department Of Energy was founded in the Carter years for the purpose of ending our dependence on foreign oil. Obviously they failed. The organization has grown significantly and spends $Bs of dollars. What influence does it have over daily crude oil/gas at the pump prices? Did this organization in any way contribute to last year's oil cost runup and, if so, how?
- the Hedge funds has been a significant influence in parts of our economy. They are largely unregulated. To what extent have Hedge funds in general played a part in recent oil industry activities and how? Soros is one of the Hedge fund managers and has a specific social agenda. What specific influences has any activity that he has had been visible to ExxonMobil and other oil industry entities?

These are the roots of my paranoia.

Charlie
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