Buying Oil on long term contracts?

[Shannow]

The electricity industry is the ultimate in supply and demand. You turn on a 60W light, and the 1000MW nuke down the turnpike opens it's governor some.

Can't be stored, so has to be made on the spot.

Cost of production is maybe 2.5c/kwhr, and average market price maybe 4c. Spot prices can vary from -10c/kwhr to $10/kwhr at peak shortage times...market price to consumers is prolly 14c/kwhr.

Customers of power generators (the people who sell to you) want various levels of risk. Some ride the market, and will pick up power at often less than the cost of production, at the risk that one day, for a couple of hours, they will be paying 400 times the cost of production. Others negotiate a contract at the average cost (plus or minus depending on Terms and Conditions).

As ultimate consumers, there are smart meters that tell you the price in peak and no peak, allowing you to decide whether it's worth cooking that roast, or welding in the shed. You can choose interuptible (like Gary Allen has) where you choose to go black at times, to pay less the rest of the year.

The absolute least cost approach is to take some of he risk onto your own shoulder. Gary's case, house gets turned off while cooking dinner (can hedge against that with dutch ovens), retailer's case he's made a killing during the non peak times, and can hedge against high prices at the peaks.

As a petrol user, you can do most of the same things.

Prices low, fill the cars, and a few cans up. High, work from home (if available), car pool, cycle, walk to the shops, or chuck a sicky (depending on our risk profile).

All involve a level of inconvenience, where you pit your time against the costs that you want to avoid.

There have been hedging companies for petrol down here, where you pay for your anticipated (mileage and miles) up front, and get reimbursed every time you pay more than the contract amount.

But you lose the utility of your money, and adding a third party will almost certainly increase your (on average) costs.

Think of it as sharing the pain of the sub primes across the entire sector.

 

[Gary Allan]

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How is it unreasonable to set a long term price as long as both sides agree? That takes the volitility out of the oil prices for me and the seller if we chose to do so.


It works as "a bet". You're betting that your realized gains from stability of price will afford you better gains in avoided costs in one way or another. ..but extend the concept to everyone agreeing to a fixed price. (this is what Ford did in that original UAW contract to fix labor costs, btw - see how that worked out longer term). There you will have shortages and distribution/demand would be, more or less, expressed elsewhere in availability of goods that require energy to produce. So while we may have cheaper fuel, there would be competition for the goods that are either produced or not produced in various places due to shortages. You would see whack a mole surges of production where availability would not exist at any price.

 

[Tempest]

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Other Commodities:

Not an issue. It is not strategic in nature like oil and I can choose to buy or not buy them if they get too high.

You don't see food as a strategic and necessary resource?
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I do offer my services at a fixed number. That was decided by union contracts and by comparing the going rate of wages for other departments of similar size and in the same geographic area. My wages then only go up if we negoiated inflationary yearly pay raises. (Which may or may not cover inflation.) What my wages don't do is possibly triple or quadruple in price in a short period of time or in the reverse get reduced by the same amount.

You have DECIDED to limit your income via the Union pay scale. Would you like an OUTSIDE body to come in and FORCE you to agree to an arbitrary pay? You have the RIGHT to leave your job and go somewhere else that might pay you more.
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**You still have never said what you feel is a fair price for oil**

You still haven't offered your definition of fairness. It is impossible. You call ~$70 fair. Your income is very high compared to the vast majority of the world. Do you think that someone in a poor country that makes per year, what you do in a day, would call $70 a barrel fair?