Buying Oil on long term contracts?

[ZZman]

Why can't countries buy oil from other countries on long term contracts? (I hate speculation ups/downs )

I would think this would help keep the huge flucuations out of the market like we saw a short time ago. It would be fair for buyers and sellers and would stablize the oil price at a reasonable and fair level for both. Not to high to hurt people but not so low that it hurts the sellers and kills the incentive to explore and drill for oil.

Oil was around 140.00 and is now down to around 34.00. Everyone probably would have been happy with a long term contract at $ 70-80.00.

 

[Tempest]

Quote:
Everyone probably would have been happy with a long term contract at $ 70-80.00.

Based on what?

YOU can go out and buy gas in bulk for a predetermined price, have you?

 

[ZZman]

I don't have the storage for it.

Is there a reason you feel that would be unfair? What is your fair price Tempest? Or do you like the roller coaster ride?

 

[scoobie]

they actually do buy on long term contracts. the companies just don't reveal the price, but you notice their obscene profits: this is by raising the price they charge to you, blaming it on rising crude prices, when in fact they locked in at a lower price. speculators also buy these long term contracts, and use their financial skills to extract profit for themselves, out of nothing.

 

[Tempest]

Originally Posted By: ZZman
I don't have the storage for it.

Is there a reason you feel that would be unfair? What is your fair price Tempest? Or do you like the roller coaster ride?

I think the market is best at pricing oil and other commodities. Otherwise you have very small group of people making decisions for the rest of us. Is that what you want to have happen?

I assume that you get some form of raise for the government job that you do, why can't we fix your salary and expect you to do more so we can pay less taxes?

What is "fair" to one person is very different from another.

History is laced with the failure of supposedly very smart people trying to flatten out the "roller coaster."

 

[Tempest]

Originally Posted By: scoobie
they actually do buy on long term contracts. the companies just don't reveal the price, but you notice their obscene profits: this is by raising the price they charge to you, blaming it on rising crude prices, when in fact they locked in at a lower price. speculators also buy these long term contracts, and use their financial skills to extract profit for themselves, out of nothing.


You think that is wrong for someone to be able to buy low and sell high?

 

[ZZman]

So who determines fair? The market? How was raising oil to over $ 140.00 so quickly fair?

There is always a small number of people making decisions for us. They are called the Congress, Senate, CEO's, your boss etc.... if they didn't, nothing would get decided.

** My wages are like many others, I get a raise almost every year. Is that an issue? Don't you? How did freezing my wages and then making me do more have anything to do with it? Why couldn't oil prices go up like wages, a certain % a year based on inflation cost.

 

[ZZman]

Tempest: Do you ever see the glass half full?............

 

[Tempest]

Quote:
Tempest: Do you ever see the glass half full

Sure. But sticking your head in the sand to avoid reality isn't helpful.
Quote:
So who determines fair? The market? How was raising oil to over $ 140.00 so quickly fair?

How about other commodities?
Quote:
After nearly two decades of low food inflation, prices for staples such as bread, milk, eggs, and flour are rising sharply, surging in the past year at double-digit rates, according to the Labor Department. Milk prices, for example, increased 26 percent over the year. Egg prices jumped 40 percent.

http://www.boston.com/business/personalf...eries_hit_home/
Quote:
For corn, these factors, along with increased demand for ethanol, helped push prices from under $2 per bushel in 2005 to $3.40 per bushel in 2007. By the end of the 2006/07 crop year, over 2 billion bushels of corn (19 percent of the harvested crop) were used to produce ethanol, a 30-percent increase from the previous year. Higher corn prices motivated farmers to increase corn acreage at the expense of other crops, such as soybeans and cotton, raising their prices as well.

http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm
Shouldn't things like food have price controls if oil does?
I don't see too many people demanding that?
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There is always a small number of people making decisions for us. They are called the Congress, Senate, CEO's, your boss etc.... if they didn't, nothing would get decided.

Do you think your life will be better if they make even more decisions for you?
Quote:
My wages are like many others, I get a raise almost every year. Is that an issue? Don't you? How did freezing my wages and then making me do more have anything to do with it? Why couldn't oil prices go up like wages, a certain % a year based on inflation cost.

You want others to provide you a service at a fixed, arbitrary number, why don't you offer your labor for the same thing?

 

[ZZman]

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.

Other People Making Decisions:

In this case it could be a good thing.

Wages and Oil Prices:

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.

What is wrong with a fixed price negoiated by all parties concerned and then yearly inflationary increases?

**You still have never said what you feel is a fair price for oil**

 

[javacontour]

ZZman,

I could ask the same don't you ever see the glass as half full question.

You see the market and prices being driven by supply and demand as a bad thing from what I'm reading here.

So instead of having "natural" forces drive supply and demand, you want to put that in the hands of a few folks.

What I will give you is that sometimes there is pain associated with the markets. Prices fluctuate and if the item increasing in price is something you really need or want, then that can be painful.

On the other hand, if you keep prices (or wages) artificially low, then supply goes away. So price controls don't work.

Let's talk about food for a moment. If food prices stay low, farmers are less likely to plant crops. Less planting (investment) less food (supply.) Less supply will mean higher prices and then farmers will plant more the following year.

Supply and demand drive price, which in terms impacts supply and demand. It's the decisions of many consumers that ultimately sets the price.

When a few are setting the price, in either direction, either higher or lower, then you begin to have problems. You begin to have pain. This is true for oil speculators on the market, or those who want to control supply (such as OPEC)

However, as we saw with the speculators, they cannot control the market forever. If the fundamentals are not there to support the prices they've bid up on the commodity, then the market will collapse.

We've seen this time and time again. This happened to stocks in 1929 and in later market collapses and/or corrections. It happened with Real Estate Markets, it happened in the Mortgage Backed Securities market, and I could go on and on.

But how is that any different from the farmer who depends on the weather for his crops. Some years the weather is great and you have a bumper crop, and other regions are having down years so you also get a premium price for your harvest. Other years, you are the only one who had a bad weather year and the rest of country had a great harvest. The prices are down and you have less to sell in the market place.

No one can predict this. Not in agriculture, not in any other commodity market. So what do you do? You plan for the worst and hope for the best. Sometimes you have to make tough choices.

Maybe you buy contracts for your fuel when prices are low if you want to make a bet on the market. Or maybe you just buy so much fuel each month (dollar cost averaging.)

I didn't think $4/gallon gas was sustainable, and I don't think the current $1.50/gallon gas is sustainable. Would I like for gas to stay at $1.50/gallon? Sure. But not if that means I have to endure shortages, long lines, and other problems in finding fuel.

So the glass is half full side of the equation is that for the most part, we've not suffered large scale shortages, either at $4/gallon or higher, nor at $1.50/gallon.

In the long run, the market is the best mechanism to determine the price. There will always be short term pain by somebody. There is pain for some when the price is "high" and there is pain for others when the price is "low"

The market will find the price that produces the least amount of overall pain. It will do that far more effectively than a small group in a room trying to figure out what is "fair"

If consumers don't think the price is fair, they will find alternatives or use less. If producers don't think the price is fair, they will not produce.

Even if a group is setting the price of the commodity in a board room somewhere, the market will still behave in this fashion.

If I had the power to set the price of gasoline to $0.299/gallon would that be good? Probably not. There would be plenty of stations with signs saying $0.299 for unleaded gas. But no oil company would be producing gasoline for these stations to sell at that price.

Likewise, if I set the price to $10/gallon, the stations would be full of gas, but far fewer cars and trucks would be lined up to buy the fuel, and refineries would likely start shutting down due to lack of demand.

Have a market where prices are established based on supply and demand is the glass is 1/2 full view.

 

[ZZman]

You guys act as if "Supply & Demand" or the "Market" is some kind of computer or entity of its own. All it is are people making pricing decisions with whatever criteria they chose to use whether true supply and demand concerns or any tid bit of news they hear.

Javacontour: Where did the artifically low prices thing come from? You don't think a long term contract of 70-80.00 a barrel would be fair for consumers and producers? You would consider that artificially low? Is it low or high because the "Market" might say so?

Wouldn't it be nice for consumers to be protected from huge price flucuations? Wouldn't producers like a steady stream of income they could count on?

 

[ZZman]

Do I like 1.50 gas...Yes. But is $ 1.50 a gallon gas realistic.....No. $ 2.50-3.00 a gallon is. Fuel has not kept pace with inflation as other things have. What is wrong with it getting it corrected and fair for both sides.

Oil is hard to compare with any other commodity. It is too important to America economy, used in too many consumer goods to be compared to other goods.

It is just as unfair for us to have paid over 140.00 a barrel for oil as consumers as it is to pay 35.00 a barrel for oil and hurt the producers. How is it not a fair compromise to pick a agreed upon middle ground like 70-80.00 a barrel and then adjust it for inflation every year. Consumers can then plan for fuel costs and producers get steady predictable income.

Why does greed always have to control everything? Why can't the world think in terms of what is good and fair for everyone?

 

[javacontour]

Artificiallylow prices come from setting the price lower than the market would.

So let's look at the following hypothetical example. Government wants to set prices. Which benefits them more, high prices or low prices?

Since most in government want to be re-elected, setting the prices lower will garner more votes. Yes they like the money from the oil companies, but they like the votes even more. So if government had control, I suspect they would set the price as low as possible to tell their electorate what they did for them.

Greed is on both sides of the market. Both consumers and producers are greedy. Producers want to maximize profit, consumers want to minimize what they pay for an item.

To argue greed is only at work on one side is not seeing the whole picture.

Fair is relative. For someone making $50K/year, others getting paid millions per year doesn't seem fair from their perspective.

However, for someone making 10K/year, perhaps the 50K/year salary doesn't seem fair.

Since there is no way to agree on "fair" the only way to work it out is in the market place.

No one holding a gun to your head saying you have to buy or sell at a price is the only way to have a fair market.

Once someone starts controlling the prices, fair is gone.

Producers control supply, that is fair since they are the ones paying the cost to bring the item to the market.

Consumers control demand by choosing to buy or not buy at a given price level.

Price fixing doesn't work in the long term because situations change. Too low and the commodity will not be available, there will be shortages because demand will outstrip supply.

Likewise, fix the price too high and there will be a glut that doesn't sell.

Think about most car dealers or almost every other business. There is an MSRP on the car. That's a sort of price fixing means. If people buy at that price, they set the price correctly.

But what usually happens with cars? They don't sell at sticker. So the price is discounted until the buyer and the seller agree on a price for that car.

When demand was high, a Prius commanded a premium over sticker and buyers had to wait.

Months later, you can probably get one today, and at a discount.

If prices are set too high, items don't move and they are marked down to sell.

If prices are set too low, the stuff flies off the shelf and producers and sellers begin to mark up the item.

As brutal as it sounds, it's really the only fair way to sell something. Go read about the shortages in the Soviet Union and East Germany that go with a centrally planned economy.

Price is meaningless if you can't obtain the item at the fixed price.

 

[javacontour]

Originally Posted By: ZZman
You guys act as if "Supply & Demand" or the "Market" is some kind of computer or entity of its own. All it is are people making pricing decisions with whatever criteria they chose to use whether true supply and demand concerns or any tid bit of news they hear.



It's not a computer, but it is self-correcting. If the price is too high, demand will drop. Millions making individual decisions does a much better job of finding the right price than a few key people setting the price of any item.

Sellers adjust the price they seek based on demand at the current price. Not enough demand, lower the price. More demand than product on hand, raise the price.

It's not a computer, but it is a feedback loop where both buyers and sellers control inputs into the loop.

It's not one sided. Even wealthy speculators can only drive the system for so long until consumers exit the market (buying less gas)

What will speculators do with oil and gas futures contracts for fuel they don't really need? They are going to try to sell them.

That is much of what happened. The speculators bid it up, but now that they need cash and don't need the energy, they are trying to sell.

It WILL correct, and I also believe we will be in the $2.50 - $3.00 range for regular unleaded in the next 24 months.

 

[ZZman]

You miss my point here I think.

I am talking about both sides agreeing on a price. Not being forced into a price whether low or high. (Much like your car price example. The buyer and seller agreed to a price and the deal was done)

At that point we decide how much oil I need. We could agree to x amount of barrels per that contract. (Lets say 1-2 years in length). At that point glut or other shortages makes no difference to me as I have locked in my oil needs.

This is the same thing many utilities are doing with coal and natural gas.

I don't think everything should be controlled but some things should be regulated because of their extreme importance. Energy is one of them.

**Some issues I have:

1)Speculators: They need to be reined in.

2)Opec Production: As we just saw OPEC wants to lower production to boost the price up. Why do that? If they were paid a reasonable and agreed upon price they could keep pumping out the oil. I want oil in the system not in the ground. Artificial shortages are not needed.

3) Where are the true shortages?: We talk of gluts and shortages but I have not seen any true shortages. There is always talk of possible shortages but everyone seems to get what they need.

4) The system is flawed because of these wild swings. Imagine if all consumer goods did that. OUCH!

 

[javacontour]

Originally Posted By: ZZman
You miss my point here I think.


I doubt it.
Originally Posted By: ZZman


I am talking about both sides agreeing on a price.


They do, everyday on the NYMEX. Oil companies offer contracts to deliver X number of barrels of oil at a price. If buyers like the price they buy, if not they put in a buy bid at a price they want to pay. So buyers and sellers agree on the price of a barrel of oil every day. It's adjusted every day. So there is agreement on the price of a barrel of oil.

But what I hear you saying is you want it set once, and kept there. That's not reasonable. Things happen, and markets react.
Originally Posted By: ZZman


Not being forced into a price whether low or high. (Much like your car price example. The buyer and seller agreed to a price and the deal was done)


Like I said, this is done everyday M-F on the NYMEX as well as other exchanges. No one is forced to buy or sell. If either doesn't like the price, they are free to leave the marketplace.
Originally Posted By: ZZman


At that point we decide how much oil I need. We could agree to x amount of barrels per that contract. (Lets say 1-2 years in length). At that point glut or other shortages makes no difference to me as I have locked in my oil needs.


It's already done. It's the oil futures market. You can lock in prices today if you want to. There is nothing stopping you from buying a quantity of oil futures contracts to do just that.
Originally Posted By: ZZman


This is the same thing many utilities are doing with coal and natural gas.

I don't think everything should be controlled but some things should be regulated because of their extreme importance. Energy is one of them.

**Some issues I have:

1)Speculators: They need to be reined in.


Unless they have infinite money, they will hit a wall, just like we saw with oil. You cannot sustain any market on pure speculation.
Originally Posted By: ZZman


2)Opec Production: As we just saw OPEC wants to lower production to boost the price up. Why do that? If they were paid a reasonable and agreed upon price they could keep pumping out the oil. I want oil in the system not in the ground. Artificial shortages are not needed.


You want. OPEC wants to maximize what they get for a barrel of crude. Since they have the oil, they are going to control how much they produce. Not much you can do about this. So control what you have control over, how much you use or how much you spend. Budget X for energy and if you have to use less to make your budget, that's what you can control.

The thing is, oil isn't going to be around forever. The glass is half full side of high oil prices is there is more incentive to find alternatives. There is economic growth opportunities and opportunities to stop paying folks who don't really care for us for their oil.

High prices are painful, but they are not the end of the world. Just a signal that we need to start looking for alternatives to using oil they way we currently use it.
Originally Posted By: ZZman


3) Where are the true shortages?: We talk of gluts and shortages but I have not seen any true shortages. There is always talk of possible shortages but everyone seems to get what they need.


We had shortages in the 1970's due to both OPEC and price controls.
Originally Posted By: ZZman


4) The system is flawed because of these wild swings. Imagine if all consumer goods did that. OUCH!



All the more reason to find alternatives to oil.

 

[ZZman]

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.
Then if "things happen" to others who chose to play in the free market, that will not be our concern but theirs.

The shortages were OPEC's doing. Prices controls were government forced. I am talking about agreed upon prices not forced.

**I would like to see higher oil and gas prices as stated earlier and for the reason you stated. To get people off their butts and get alternative energy sources into production and use.

 

[javacontour]

Like I said, you can try to do this today. Set up contracts to buy quantities of oil at a fixed price for your time period.

If you can find a seller willing, there is nothing stopping you.

However, most folks want to be flexible, just in case something happens.

When do you want to buy oil, I see prices for deliveries going into 2017. Looks like oil for delivery in 12/2017 is going for $76.45/barrel today.

http://www.nymex.com/lsco_fut_csf.aspx?product=CL

 

[ZZman]

That is interesting.................hmmm