Monday, June 16, 2008

Oil Price Floor

Hey all. I am back, tired, and sunburn which means it was a good weekend. Of course there was talk about the markets. My bearish opinions in conflict with a couple of bulls. Also some conversation on what no one is talking about, the treasury move last week. That was the story last week. Biggest move since 1982 which is when interest rates where double digits. Your talking a multi sigma event that is not getting much attention in the financial media.

Anyway saw this which was a little different twist. Auto companies worried about an oil crash.

"When prices collapsed in the late '70s all investment in alternative fuel technology ceased and essentially that led the auto industry to the mess it is in today. The same would happen if prices fell below $50 a barrel today."

Cole, with the support of leading US auto industry executives, is expected to call on Congress to set a floor for the price of oil.


Mikey said...

We have had an exponential growth in population, we are shifting billions of poor to the middle class, and we have finite resources.

Despite the recent runup, I think oil is still shockingly cheap.

Short term, who knows where oil will go. Fundamentally, what is oil worth to you? I know people say, it only costs $x to produce... I say, who cares. It cost Microsoft nothing to press a disc, etc., so the production cost can't be the fundamental value of oil.

I suspect the fundamental value is in the 1000-2000 neighborhood. We shall see. If machines like cars become more efficient, then, actually, the fundamental value should go up since you're getting more work from the fuel.

If you were on Easter Island a few hundred years ago... how much was that last tree worth?

At any rate, the market is incredibly overpriced. The price of oil has not been factored into profits. It's so obvious.

Market Seer said...

A couple of problems with your analysis. Microsoft is not producing a commodity product. As a result they can earn economic profits over the long term where as for commodity producers MC (marginal cost) must equal MR (marginal revenue).

Secondly lets take the low end of your price range. $1000. That would imply a $30 a gallon for unleaded gasoline. Even if you had a very efficient car that got 30 miles a gallon you would be paying a $1 per mile. That is completley impossible within the current economic structure. As a result demand would drastically fall off. In many cases it would not even make fiancial sense to go to work.

I must disagree with you. I have no idea where oil is going but I would be willing to wager a pretty penny it does not go to a $1000 a barrel in the next 5 years.

Mikey said...

My conclusion is that production cost is production cost, not fundamental value.

Yeah, 1000-2000 is not my short-term or even 5-year prediction for the price of oil. It's what I think oil is worth. There's a difference.