When you see in the new oil prices, what you see quoted is the price for a barrel of Light, Sweet crude for delivery in the upcoming month. That is, what you see in the news is the price for the August 2005 future. I believe it's for the future and not the option. The future is a commitment to buy. The option is the option to buy, not an obligation. As you can imagine, those 2 differences alone can affect pricing. Options only go 36 months out. Futures, the commitment to purchase the oil, go out 84 months (7 years!). Plus, keep in mind, that not all oil pumped is of as good as quality as Brent crude. So it's likely fetching less / barrel because it's more expensive to refine. A quick scan at futures prices show a bit of an uptick. Aug 05 delivery is $60.75/barrell (as contrast, the same contract for Brent is going for $59.25 / barrel). Jan 06 is the peak at $63.46. That's a bit of a jump. But if you assume 3% inflation, in terms of real dollars, it's a tad smaller. What's interesting is looking out into the future. For example, Dec 07 futures are at $60.65. A slight drop from today right? Well, assuming 3% inflation, in terms of real dollars that's almost a drop of about $4/ barrel from today's 30 day contract prices. Or go out to the end to the Dec 2011 futures. They're priced at $58.60 right now. Again, assuming 3% inflation that's $48.16/ barrell in today's dollars. Now this is just what the market is deciding today. Things can change. Markets are run by humans and prone to bubbles and other temporarily "irrational" behaviors. On the other hand, they reflect that there are people out there putting their butts on the line either in terms of their own money or their jobs cuz it's someone else's money. And markets do show the collective answer for a large group of people. I point this point this out for a couple reasons. Mainly it's all the attention the peak oil theory has been getting lately. Apparently the markets don't forsee that the peak has been reached. That doesn't mean the markets are right but one has to wonder why the big gap. If peak oil is really so close, wouldn't that in some way be reflected in pricing 7 years out from now? And if the markets are going to be wrong, wouldnt' they tend to be wrong in the short term on the side of the hype? That is, when tech stocks were the rage, they had silly valuations for crap companies like buy.com (was ran so that they didn't make money on the products they sold; they were going to make their profit from advertising with selling goods driving the traffic for the advertising). Likewise, with everything going on, the current tight oil supplies, China and India booming, Iraq and Afghanistan seeming to at best keeping things just as messed up in the Middle East as they have been, oil companies recently slashing their future reserves, and such, wouldn't all of this be causing the hype to put pricing pressures up? And it just for the next 6 months to year. But why does it drop off? Why are the peak oil folks so sure of one extreme while the people putting their money on the line buying and selling oil go the other way?
This may sound strange, but I want oil prices to remain high. This will accellerate the economic incentive to find substitutes, and also it will make in the short term, alternatives such as Albertan sand oil economicaly viable. (And I would rather have my fuel dollars go to Canada than most of teh other oil producing nations)
This is a good topic, prk166. I saw something on Brad DeLong's blog touching on this a while back, and he linked to someone that actually had graphed what future prices were and how they matched up to what actually happened. In short, the fellow that DeLong linked to essentially said what you said. I wish I could find that post right now, but I don't have the time. Maybe later tonight. Ultimately, though, we are going to need to replace oil. And the sooner we start finding substitutes and putting them into action, the less wrenching the change will be.
The future exchange happens in its own little world with very little connection to real things like remaining supply or even cost to extract the item.
We could ask the stock market if oil prices matter. http://www.msnbc.msn.com/id/3683270/ This part was interesting: Halliburton Inc. fell 93 cents to $48.71 even after the U.S. Army awarded the company a $4.97 billion contract to provide logistics support in Iraq. The contract is $1 billion more than the previous year.
I don't follow Halliburton, but in general that contract would have already been factored in the stock price. It's highly unlikely this is the first investors are hearing about it.
I think the implication is that Halliburton would have been hit harder in the stock price without the military contract. Btw, was this ever opened up for bidding? Not that we could change horses mid-stream.
Wait. So you're saying that Exon is willing to committ to providing a bareel of oil in the future for a specifc price irregadless of what they feel supply will be in 2011? Are you telling me that as whole, these institutional investors are willing to buy and sell the promise of this oil irregardless of what is happening out there? So if Saudi Arabia announced that 2009 would be the last year the country would export oil (god knows why, just theoretical) , that it would not be reflected in the market? These people are just tossing tens of millions around here and there with no rhyme nor reason?
Has anyone seen nickle futures? I fear the world has past the point of peak nickle production. Oh and scrap steel futures tell me we've run out of scrap steel. We've hit peak scrap steel production. There may be no more sources of scrap steel. http://www.findarticles.com/p/articles/mi_m3MKT/is_14-3_113/ai_n13629681 http://www.moneyweek.com/article/327/investing/economics/steel-price.html http://www.lme.co.uk/nickel_graphs.asp (plot 2000 to 2005) a 100% increase.
Perhaps the future price of oil is related to the fact that the large oil companies have exploration projects going on all over the world right now. The future returns of all exploration projects and drilling operations under construction are factored into the future price. In other words, the oil companies already know that there are untapped areas of the world which they simply have not got around to drilling in yet. That, in combination with the forecasting of future use of alternatives to oil, gives oil a lesser value as a commodity in the future. Of course we could probably take about $10 off of a barrel tomorrow if we would just announce that we were going to start drilling in Alaska and tell OPEC to F-off(the caribou will just have to adjust).