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A Case For Price Controls On Oil  
User currently offlineDerico From Argentina, joined Dec 1999, 4312 posts, RR: 11
Posted (5 years 10 months 3 weeks 2 days 8 hours ago) and read 1434 times:

Basically, the creation of a price range for oil. No lower than $75 Us dollars at anytime, no higher than $99, with periodic reviews upward or down depending on the demand curve.

I believe in free markets, and the supply and demand that creates investment or dircourages consumption. In most products and under most circumstances, this system works, and it promotes a fair and plentiful availability of the product, encouraging production when needed or cutting it when the price gets too low. It has been shown historically that extended price controls lead to less supply of a product, and shortarges.

All that said, the ''price'' of oil, has become a completely speculative trade. So much, that it basically has destroyed the advantages of a free ranging price for petroleum.

It wasn't four months ago that the world was being crushed by ever higher oil, and oil companies where all optimistic about a multitude of new oil fields and places that were now 'economical' due to the high prices, and not to speak of all the alternative fuel sources.

Fast forward to today: oil companies basically have cancelled all those projects. As soon as all the economies in the world which are currently shrinking, almost all in Europe, North America and Asia (the largest oil consuming regions), even show ticking up, oil WILL surge to 150 again.

And then to 200, even higher. Oil companies will say now they can resume those projects... and then the world economy will choke yet again. Another massive recession will ensue, oil will drop below 70, oil companies will cancel projects. The low price will make consumption rise again, leading to another spike... and so the vicious cycle will go eternally. I don't see equilibrium ever coming again to the price of a slowly vanishing resource.

The free market is no longer functioning for oil. It is not encouraging larger supply, because the price is too volatile for companies to adapt their long terma plans. And it is encouraging overuse when the prices goes low, and total pain for millions of people when it surges.

A more predictable 'high' oil price, but not a crushing high price, will lead to further development and slightly restrain use without throwing markets and economies and companies to turmoil.


My internet was not shut down, the internet has shut me down
9 replies: All unread, jump to last
 
User currently offlineNighthawk From UK - Scotland, joined Sep 2001, 5165 posts, RR: 33
Reply 1, posted (5 years 10 months 3 weeks 2 days 8 hours ago) and read 1427 times:



Quoting Derico (Thread starter):
And then to 200, even higher. Oil companies will say now they can resume those projects... and then the world economy will choke yet again. Another massive recession will ensue, oil will drop below 70, oil companies will cancel projects. The low price will make consumption rise again, leading to another spike... and so the vicious cycle will go eternally. I don't see equilibrium ever coming again to the price of a slowly vanishing resource.

The current financial crisis is unrelated to the cost of oil, it is all caused by banks offering mortgages to people that have no hope in hell of paying them back. Your idea that it will form a vicious cycle is flawed. High oil prices will not necessarily trigger a resession.

Artificially fixing oil prices is counter productive - oil reserves are decreasing so we need prices to rise to encourage people to reduce consumption.

What does need to happen though is ending speculation - oil prices should be entirely dependent on supply / demand, and not on profiteering.



That'll teach you
User currently offlineArrow From Canada, joined Jun 2002, 2676 posts, RR: 2
Reply 2, posted (5 years 10 months 3 weeks 2 days 6 hours ago) and read 1393 times:

No. I still think the market is the best price setter we have. As soon as you put floors and ceilings on prices you warp investment decisions. You either promote production of uneconomic resources through a price floor, which invariably discriminates against those resources that are economic. Or at the other end, you restrict investment by telling a potential investor that there's a top end to what his return might me, and that it won't be determined by the market. That will lead ultimately to shortages.

I'm by no means an expert on what is needed to control wild price swings caused by futures markets. I still think the free market is the best regulator. But price controls is not the answer.

[Edited 2008-12-04 11:07:02]


Never let the facts get in the way of a good story.
User currently offlineNIKV69 From , joined Dec 1969, posts, RR:
Reply 3, posted (5 years 10 months 3 weeks 2 days 6 hours ago) and read 1373 times:



Quoting Derico (Thread starter):
All that said, the ''price'' of oil, has become a completely speculative trade. So much, that it basically has destroyed the advantages of a free ranging price for petroleum.

Please don't lose sight of the fact that demand drives what we pay for oil. If we conserve and not use too much we won't have any problem. If we stop buying SUVs and Hummers as status symbols and car pool once in a while you would be surprised.

Quoting Nighthawk (Reply 1):
What does need to happen though is ending speculation - oil prices should be entirely dependent on supply / demand, and not on profiteering.

 checkmark 

Quoting Arrow (Reply 2):
I'm by no means an expert on what is needed to control wild price swings caused by futures markets. I still think the free market is the best regulator. But price controls is not the answer.

 checkmark 


User currently offlinePPVRA From Brazil, joined Nov 2004, 8969 posts, RR: 39
Reply 4, posted (5 years 10 months 3 weeks 2 days 6 hours ago) and read 1368 times:



Quoting Derico (Thread starter):
Fast forward to today: oil companies
basically have cancelled all those projects. As soon as all the economies in the world which are currently shrinking, almost all in Europe, North America and Asia (the largest oil consuming regions), even show ticking up, oil WILL surge to 150 again.

This isn't limited to oil companies. Many, many companies are canceling projects, commodities or not.

Quoting Nighthawk (Reply 1):
The current financial crisis is unrelated to the cost of oil, it is all caused by banks offering mortgages to people that have no hope in hell of paying them back.

This goes as much to your comment Nighthawk as it goes to Derico's point: cheap credit wasn't limited to housing. It was available for anything, housing was just one victim. A flood of credit can drive up demand (suddenly you can buy much more than before), just like the Fed is trying to do now to revive the economy. Driving up demand of course drives up prices, including the price of oil.


This is a great article and points to where the source of this crisis is--horrible monetary and fiscal policy that does not believe in economic corrections, only booms, and actively tries to finance it's way out of it.

The banks are not off the hooks, because they took advantage of this massive liquidity provided by central-banks and got themselves into trouble. A further problem is, this was the whole reasoning behind dumping liquidity into the markets in the first place, to get banks TO LEND MORE (sound familiar?) and drive investment up. That was accomplished, demand and thus prices of everything went up, but now they are collapsing as they were at unsustainable levels (a bubble), destroying the reasoning behind those investments.

All the unsustainable debt that was piled on needs to be written off the books and allow us a fresh start. It will certainly hurt, but it's the quickest way to get the economy moving again. Use that $700bi to help people who may lose jobs but don't prop up bad debt and poor managers.

[Edited 2008-12-04 11:49:54]


"If goods do not cross borders, soldiers will" - Frederic Bastiat
User currently offlineDerico From Argentina, joined Dec 1999, 4312 posts, RR: 11
Reply 5, posted (5 years 10 months 3 weeks 1 day 11 hours ago) and read 1266 times:

Oil is now at 42... I personally think the oil market is not one driven by fundamentals anylonger.

I understand where you guys are coming from, but if you think there will be eventually equilibrium, think again.

Oil is a slowly dwindling resource. When a resource becomes scarce, it is subject to ever more volatile swings. On top of that, like I said, oil has become a quick money speculative trade. As soon as the world economy shows signs of growth, money will POUR into oil.

And consider the massive money printing and easing being done all over the world. Eventually that money will want to seek higher returns... you will see a monumental speculative drive on oil and perhaps other products due to the, basically, ''free'' money being made all over now.

I am extremely pessimistic about this. I Think you will see several oil shocks in the next 20 years that will make economic cycles unpredictable, preventing any long term investment planning in things like autos, exploration, airlines, consumers, etc.

I personally think the free market will no longer work for oil.

Let me edit, the free market will work for oil, as a speculative vehicle, but not as a reliable resource for anyone who isn't a computer flip-trader.

[Edited 2008-12-05 06:40:22]


My internet was not shut down, the internet has shut me down
User currently offlineHAWK21M From India, joined Jan 2001, 31684 posts, RR: 56
Reply 6, posted (5 years 10 months 3 weeks 1 day 7 hours ago) and read 1246 times:

Today.The Government of India dropped the prices of Petrol & diesel by Rs 5/- & Rs 2/- per litre respectively.Thats a huge drop.
regds
MEL



Think of the brighter side!
User currently offlineSlider From United States of America, joined Feb 2004, 6858 posts, RR: 34
Reply 7, posted (5 years 10 months 3 weeks 1 day 6 hours ago) and read 1233 times:



Quoting Derico (Thread starter):
I believe in free markets

This statement and then your call for price controls are mutually exclusive. If you have a legit beef with speculators, then there are ways to address that. You’ll note that we saw some relief in prices once the pro-drilling crowd got traction—it bled off some natural hyperinflation in the bbl price. But to say that the market got out of whack or claim that there is some fundamental flaw is really without merit.


User currently offlineDerico From Argentina, joined Dec 1999, 4312 posts, RR: 11
Reply 8, posted (5 years 10 months 3 weeks 22 hours ago) and read 1197 times:



Quoting Slider (Reply 7):
This statement and then your call for price controls are mutually exclusive. If you have a legit beef with speculators, then there are ways to address that. You’ll note that we saw some relief in prices once the pro-drilling crowd got traction—it bled off some natural hyperinflation in the bbl price. But to say that the market got out of whack or claim that there is some fundamental flaw is really without merit.

So where is the control on speculation? Everyone here seems to blame 'speculators', but none gives forth who 'they' are. See that's the problem, how do you differenciate a speculator from someone who invests in oil for other reasons? You can't.

If you guys want to see 300 dollar oil in 2012, fine, it will occur. Then another recession will ensue to drop oil again to 60 or 50 by 2013, and then in 2015 or 2016 is back to 400 oil.

Good luck finding any business on the planet that will make investments based on such steady price.



My internet was not shut down, the internet has shut me down
User currently offlineMham001 From United States of America, joined Feb 2005, 3681 posts, RR: 3
Reply 9, posted (5 years 10 months 3 weeks 22 hours ago) and read 1191 times:

The reason that oil is traded as a commodity was because OPEC had too much control and used it as a weapon. The establishment of a commodity market was one of three steps that basically broke OPEC after the '70's oil embargo. Overall, it has served us quite well, less the last bubble of course. I believe that won't happen again anytime soon, and I'm reading plenty of experts saying the same thing.

Of course, if you live in an oil revenue dependent country who's budget is predicated on $90/bbl and a leader who has squandered the bubble revenues, you might disagree.


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