Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Posts Tagged ‘oil price’

Oil Price may drop to $10/barrel

Posted by butalidnl on 14 December 2015

Last year, I posted a blog Oil Price will settle at around $35 predicting that oil will stabilize (on the medium term) at $35/barrel. On 14 December, the price of Brent oil was below $38/barrel. So, will the oil price finally settle at $35/barrel? Yes, but not right away. The nature of markets is that they tend to overshoot equilibrium points. Thus, the price will probably overshoot downwards; resulting in short-term prices well below equilibrium.

The limits of this is determined by cost. The average cost of producing oil is $35/barrel – with $25 as the price of development, and $10 the price of extraction.  The costs differ, based on the particular method of producing oil. Land-based shallow wells cost less than $25/barrel to develop; and also less than $10/barrel to pump. Deep-sea wells cost $50 or more to develop, and $10/barrel to pump. Oil from tar sands cost very little to develop, but $50/barrel or more to extract.

The present situation of every producer pumping as much oil as they can would mean that the price would continue to drop below $35 (at least in the short term). Since production from existing wells continue to be profitable (i.e. the price of the oil is higher than the marginal cost of production); owners of those wells will continue pumping oil. They will do so until the price reaches $10/barrel,  the point where it will be more profitable to stop producing (for a large number of wells).
This means that, in the short term, the oil price could reach as low as $10/barrel.

This is only for the short term, however. After a while of oil at extremely low prices, when little or no new wells are drilled; the total oil produced will decrease because the depletion of existing wells is not compensated by production from new wells. The lower production will drive prices up, until it reaches the point where it would again be profitable to drill new wells.
Thus, the price will gradually rise, until it finally would stabilize at about $35/barrel.

In the long term (more than 5 years), the average cost of production would inevitably increase, as cheaper sources of oil get depleted. Thus, more and more, deep-sea wells and tar sands will take on a bigger proportion of the total oil produced. This will raise the average cost of production, meaning that the equilibrium point will rise.

In short, here are the projections for the oil price:
– short term (6 months to a year): as low as $10/barrel
– medium term (2 to 5 years): stable around $35/barrel
– long term (more than 5 yearsr): price will rise gradually, reflecting rising average production costs.

Posted in economics, World Affairs | Tagged: , | Leave a Comment »

High Oil Price?

Posted by butalidnl on 25 September 2011

The recent strike against high oil prices was not only unsuccessful, it was also futile. Because the government’s response was limited to two choices: either to leave things as they are, or decide to subsidize oil prices. There was no chance that the government could, or would, force oil companies to lower their prices. And I think that subsidizing oil prices is an entirely wrong thing for the government to do.

High International Prices
The price of oil products is indeed high. Compared to previous months, the prices of oil products have risen quite significantly. However, this is simply because of high international oil prices. The local oil companies may have prices than are a bit higher than they should be, but this would be because of inefficiency and not greed.

Oil prices in the Philippines, despite appearances, are in line with international prices. Filipinos point out to spot prices of $88/barrel, and ask why the price at the pump is similar to when the price was $130/barrel in 2007. Well, there are two reasons why this is so. First, the price of oil that the Philippines buys is based on the Dubai crude price, not on the West Texas Index of the US. Dubai crude price is similar to Brent crude at $112/barrel, while West Texas crude is $88/barrel (price of West Texas crude is 27% higher than Dubai crude). The second reason is that the quoted West Texas or Dubai prices are spot prices, i.e. they are the price for single shipments for immediate (within a month) delivery. Companies importing oil pay prices agreed to in long-term contracts (contracts of a year or more) where the price is lower. In 2007, the spot price may have reached $130/barrel, but long term contract prices were probably only half that. But now, with spot prices lower, the long-term contract price is only a few dollars lower than the spot price. It may be that the long-term contract prices now are higher than those of 2007.

A better approach to looking at prices is to compare the retail price of gasoline between countries. Retail prices would already include all costs that go into gasoline e.g. transport, refining, distribution, taxes etc. A ( comparison of international oil prices ) show that US prices are about $3.79/gallon, while that of the Philippines is $5.00/gallon (On 9 Sept, average price of gasoline was P55.95/liter ).  If we consider than the price of West Texas crude is 27% more than Dubai crude, the Philippine price should be $4.81. And if we consider that WTI is the price of crude oil already in the US, while in our case, the crude has to travel from the Middle East all the way to the Philippines, or price of $5.00/barrel sounds fair enough. The countries near us (e.g. Malaysia, Indonesia) which have lower retail gasoline prices subsidize them.

Better Response
Bayan Muna, Piston and other leftists would of course reject the above reasoning. They would point out that the oil companies are ripping off everybody. And in a sense, they have a point. But if this is so, then a strike in Manila would surely not be enough to reverse a policy that even manages to ‘rip off’ US consumers and consumers all over the world. The local oil companies that we have are not doing the big rip off. In fact, as we have shown above, they are probably ripping us off a lot less than their US-based counterparts are.

The government could still take meaningful steps against the high prices of petroleum products.  First of all, it could promote gasoline efficiency, by providing tax incentives for people to buy hybrid cars. Or by having centers that check and improve the efficiency of engines, for a discounted price. The efficiency of many tricycle  and jeepney engines could be significantly improved by relatively small changes to the engine.

Then, the  government could also initiate the process of raising jeepney, bus and taxi fares. Not that an increase should be done now, but that there will already be a decision to raise fares when diesel price exceeds a certain amount. So that drivers and operators of public utility vehicles don’t need to do the whole process when the price does increase.

There may also be a need for the government to closely monitor the books of the oil companies, to make sure that any lowering of costs are passed on properly to the consumers, and that price increases are truly based on real increases in costs, and not merely in anticipation of them.

Posted in Philippine economics, Philippines, World Affairs | Tagged: , , , | 1 Comment »

Two Years After the Fall

Posted by butalidnl on 10 March 2011

It is now March 13, 2014. America has undergone a huge shift in its economy in the last two years. On this day, in 2012, the dollar “fell” in value, by about 100%; and more importantly, it “fell” from its position as the world’s reserve economy.

The Dollar Falls
It all started in November 2011. Riots had broken out in Saudi Arabia, and the government was frantically trying to restore order. The Saudi government had bungled in its handling of a relatively small disturbance among Saudi Shiites in Qatif, in the Eastern province. In November 2011, the disturbance had escalated into a nationwide protest movement. By December, workers in the vital oil industry and in the ports had gone on strike. And the demands had hardened – where before they had merely asked for the release of arrested Shiite leaders, protesters had now gone on to demanding a Constitutional Monarchy, some even wanted a republic, while others were calling for the independence of the Eastern province. All of this caused the price of oil to go through the roof. By the end of December,  oil had reached $200/barrel.

To make matters worse, the US response to it was also wrong. Congress passed a new Stimulus Bill of $500 billion, and the Fed proclaimed QE4 – a program to pump $1 trillion into the economy, as a response to the new recession. Unlike what happened during the 2008 recession, however, the US was now alone in pursuing an expansionary policy. This caused a lot of misgivings in other countries regarding the value of the US dollar.

Oil producing countries responded by demanding that they be paid in “hard” currencies – e.g. Euro, Yen, even the Chinese Yuan – and NOT in US Dollars. By January 2012, Central Banks all over the world decided to cut the US dollar component of their reserves, by a modest 1/4. Thus, from an average of 80% of reserves in US dollars, to 60%. This seems to be a modest change in policy; but when it is done by ALL Central Banks at the same time, it had a devastating effect. This policy meant that the Central Banks would gradually replace their dollars with other currencies in the course of a number of months, eventually ending with the target percentage of US dollars in reserve. By the end of February, however, the value of the US Dollar had gone down to the point where Central Banks holding lots of dollars (mostly in the form of US Treasury Notes) became nervous. They stood to lose a lot, if the dollar lost value.

So, it finally came on Tuesday, March 13, 2012. The Saudis were the first to dump their US dollar holdings. This was followed by Russia, Japan, and then China. After this, everybody else dumped their dollar holdings. You could probably speak of an “oversold” situation with the dollar then, but Central Bankers didn’t care anymore – they just wanted out, as quickly as possible.  As a result of all this, the dollar sunk to $4: 1 Euro on March 16, 2012. In the months following, the dollar regained some strength, finally stabilizing at $3:1Euro by December 2012.

Picking up the Pieces
The US was left to pick up the pieces. It still had a big budget deficit, and a huge payments deficit, and a 16 trillion national debt. The only good news in all this was that the national debt remained at 16 trillion dollars, even though the dollar was half its former value (thus, effectively the national debt was reduced by half).

The US had to go to the IMF to borrow money to finance its budget deficit. Nobody else was willing to lend the US money at that time. The US got a 500 billion SDR loan from the IMF (roughly equivalent to $500 billion at the old exchange rate). But the IMF loan came at a price: the US government had to cut spending, and increase taxes, and it had to have a concrete program to balance the budget by 2015. The US also had to open up its economy to foreign investments (thus, the airline, oil, banking etc. industries were opened to 100% foreign ownership).

The IMF conditions were tough, but now, 2 years after the fall, the economy is on its way to recovery. US labor costs had dropped in relation to the rest of the world (while the US dollar’s value was halved, prices rose 30% and wages rose only 10%). This has led to a huge expansion in US-based manufacturing of products which used to be imported from China. (Another large chunk of the production had gone to Mexico, from which it is cheaper to ship to the US.) Automobile production has greatly expanded, with so many people buying smaller cars, hybrids and EVs (Electric Vehicles). And there is now a huge demand for buses, as local governments expand their public transportation services.

Tourism is now booming, with Asians and Europeans making the most of  “cheap” US vacations – tourism revenues have quadrupled since 2012. There is also a surge of “medical tourism”, with Europeans and Asians coming for elective surgery (which are not covered by their country’s health insurance).

American university enrollment has surged; while the number of American students has lessened, foreign students have more than made up the loss. Foreigners find that the US is offering quality education at bargain prices. And while foreign graduates are now in demand in the US, a bigger percentage of them opt to work in their home countries about graduation.

The stock market is enjoying a bull market of sorts – the Dow Jones just topped 20,000 points last January. Some companies are having a hard time: Walmart’s sales suffered as a result both of the lower purchasing capacity of people and the higher prices of goods. It is now repositioning stores to city centers, since people now find their suburban locations “too far away” (due to high gasoline costs). Starbucks has suffered because people have decided en masse that Starbuck’s coffee is a “luxury that they could live without”. Airlines are suffering from people cutting back on air travel.

But more companies are thriving: McDonalds has noted an increase in sales, even in the face of 30% higher prices; Amazon has seen a boom in the sale of Kindles and e-books (paper prices have also spiked); IT companies are profiting from people spending more time at home (people are also working more from home).

People have developed new habits. The magnetron is still all important; what’s new is that companies are now selling magnetron meals in reusable containers. Children often go to school now on bikes (leading to a reduction in child obesity). People are consuming more (local) vegetables, and eating less meat.

Many more people are employed than at any time in the past few decades. The unemployment rate is now at 5%, and is still dropping. There are less illegal Latinos now, since many Mexicans now prefer to work in the new Mexican factories. Americans are now more willing to take on farm jobs that were formerly done by Latino migrants. There is a marked reduction in the drug trade, with lower US buying power and prosperous Mexican workers.

There are now plans to build a nationwide rapid rail network. Ordinary rail lines are more intensively used for carrying products (replacing trucks), and a lot more products are transported by water. Solar farms are being set up in the Southwest; in Hawaii, the government is feverishly building solar and wind power plants (Hawaii was the worst hit by the oil price rise).

The “fall” of the dollar has caused a lot of suffering in America. But the American people are not only adapting well to the change, they are actually thriving. The resilience and hard work of the American people is now showing that a new economy could be fairer, greener, more equal, and eventually, more prosperous.

Some people say that the “fall” may have been the best thing to happen to America. They’re probably right. The future indeed looks quite bright.

Posted in World Affairs | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments »

$5/gallon gasoline isn’t that bad

Posted by butalidnl on 10 April 2010

The economy of the US is recovering. In two years time, GDP will probably be at the level it was before the great recession. This should be good news, except for one thing: before the great recession, oil prices reached $150/barrel, which meant that gasoline was $5/gallon. Things have not improved since the last time, in terms of oil supply; in fact, they have deteriorated, since oil consumption in Asia had been rising even during the time when the US was in recession. Thus, when the US economy will be “back to normal”, total world oil demand will be higher than it was when oil was $150/barrel. Which brings us to the conclusion that oil prices will go to $150/barrel or higher by 2012.
Is this going to be so bad?
Well, yes and no. Yes, in that people’s budgets aren’t yet adjusted to a $5/gallon price. No matter how you look at it, this will be a blow to consumers’ ability to consume other things. However, after the initial shock, we will see that that price rise isn’t so bad after all.
Europe has been living with that price for years, and its people aren’t miserable; and of course, with $150/barrel their oil prices will go even higher. So, it is a price that you can live with. But the thing about higher oil prices is that it shifts economic patterns in a way that may be good for you, in a way.
Let us take a look at some of these:

Higher gasoline prices will mean higher cost of transportation. This will also affect the transport of goods from places like China. All of a sudden, some goods will no longer be cheapest when sourced from China; meaning that it may be cheaper to produce them in the US (or Mexico). If US manufacturers are smart, they will then start producing more in the US, than importing them (of course, the thing is to hit on which products to do this with). And this translates to more manufacturing jobs in the US. This can’t be bad news.
The high cost of gasoline will also affect the way you commute to work. The long commute will be more expensive, meaning that you may be forced to take public transportation (buses or trains) to work, but it also means that it pays to move to smaller, integrated towns, where work and most services are relatively near. Of course, the shift to more integrated towns, instead of the system of sprawling suburbs would not be easy or happen instantly. But it will happen gradually, and you may end up having a nicer quality of life when you don’t need to commute too much.
Food prices will also be affected by higher transport costs. This would also affect the way food is produced. Now, meat is produced by gathering lots of cows etc, and fattening them in feed lots. This system is quite prone to all kinds of diseases, and is rather taxing on the environment. When it becomes too expensive to transport the cows etc to central locations, production will become more decentralized, not only for meat, but for all food. And this means that you will be able to enjoy locally produced food at more reasonable prices.
With a higher price of gasoline, the demand will be for smaller, more fuel-efficient cars. Maybe even electric vehicles. And these would be quieter, give out no smoke (less polluted city centers), and would be cheaper to operate than gasoline cars. Wouldn’t it be nicer to live in a city where most vehicles are electric?
And maybe people would walk more. It is certainly cheaper to walk to school or work, or go there by bicycle, than to go there by car. And if this happens, it would also help reduce obesity, since people would be getting more exercise.
Of course, all these may not happen immediately, or even when $5/gallon comes. But the trends are there, gasoline prices will go up, and the changes I have just enumerated may become more and more the reality.

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The big freeze of 2010

Posted by butalidnl on 9 January 2010

The big freeze of 2010 is now on its 9th day. It’s been freezing here in the Netherlands since New Year’s Day, and its been more or less the same in North America and Asia for the same period.  We get snow and freezing temperatures here every winter, but it usually keeps on for a week or two.  This winter, we have already entered the third week of below-freezing temperatures (if we count the freeze before Christmas), and things are getting too cold for too long for people and the infrastructure. And with the news that the cold seems to be feeding on itself, and thus may last much longer, the economy is sure to suffer.

Higher price of oil
One obvious result of the big freeze is that the price of oil will surely rise. It has already exceeded $80/barrel, and the freeze is just over two weeks old. Imagine what would happen when the freeze goes on for a whole month. In some countries, utilities are being urged to use up their coal to free up the supply of oil and natural gas for home use. But the coal is sure to also run out after a while.

Transportation Disruptions
The snow and cold are affecting all kinds of transportation. Airport runways are sometimes closed due to the snow; train schedules are cut down, or even sometimes cut off due to the cold and snow; and even trucks and cars couldn’t get through all the snow in the roads.  All these could be absorbed if the snow stops right away – with more intensive schedules after to recover the lost time and miles; but they could no longer recover if the cold lasts two weeks more.

The supply of salt used to keep the roads open is fast running out in many countries in Europe. When it does, we will just have to live with snowed-in highways.  And in addition to the inconvenience this would cause personal travel, it also wrecks havoc on the movement of supply trucks with all kinds of necessities, from soap to flour..

Lower Sales
And there is the matter of it being so cold that people do not want to go shopping. In fact, people ration their time out,  and generally buy only necessities. What this would do to the output of the retail sector is anyone’s guess.  At least, the sales of winter-related things like sweaters, socks, thermal underware, etc. should perk up a bit.

Other Disruptions
And then there are the other disruptions: citrus fruits in Florida are in danger of freezing and getting rotten in the process; school closures forcing their parents not to report to work; floods in the Balkans due to melting snow; buildings collapsing due to the weight of the snow on their roofs.

All these disruptions and more will be taken in stride if the snows end right away. However, the way things look right now, the cold spell will last at least a week or more longer. Thus, the economy will surely suffer from the big freeze of 2010.

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