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The Price of Oil Is About to Blow a Hole in Corporate Accounting

bloomberg.com

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Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#41

Post by ubernostrum »

peteretep wrote: post #16
TTPrograms wrote: post #15

Earlier quoted context omitted.

Current P/Book values for oil companies now seem to reflect that the market is pricing them with oil reserves at current prices, not reported prices. If it bumps lower around Q1 and Q2 as actual oil price filters into the books then that would be pretty irrational, and likely reflects opportunity.

Right? The whole article seems to be based on the premise that the markets are too stupid to have done the maths, and will need to have it spelled out to them, but somehow this Bloomberg journalist has discovered a huge secret

the markets are too stupid to have done the maths

Lucky for us, the markets are made up entirely of perfectly-informed, perfectly-rational, perfectly-self-interested frictionless spherical humanoids in uniform harmonic motion.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#42

Post by msandford »

tptacek wrote: post #31
x0x0 wrote: post #20

Earlier quoted context omitted.

You should look at the graph [1: the article, 2: a hotlink] labeled "Welcome to the Terrordome..." showing the prices of various oil sources vs solar over time. If the fantastic decline in solar prices continue, many oil sources will soon be not economical. And yes, I know there's storage problems and energy density problems for mobile vehicles, but oil is still a riskier bet than I think you portray. [1] http://www.…

This is pretty weak. The reason solar-power generation will increasingly dominate: it’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. That's true of shale oil extraction as well. The corresponding chart conflates all natural gas extraction under the "Henry Hub" label, and all crude extraction under "Brent". Meanwhile, it tries to show an exponential price decline in solar by…

> it’s a technology, not a fuel

Maybe! But nothing has an infinite lifetime, so while solar is a technology, the actual solar panels that get made aren't, they're a durable good or an asset, depending on your point of view.

Right now, in a lot of ways a solar panel is simply a way to burn a fossil fuel to make more fuel. Since the lifetime isn't infinite you can compute the amplification factor. Depending on how you calculate it might be a factor of a couple up (just based on price) to a couple dozen (joules to joules). But it's not infinite.

http://www.scientificamerican.com/article/solar-cells-prove-...

This finite lifetime and substantial capex is one of the reasons people criticize basically any kind of ocean power; the environment is so harsh that it's hard to do a lot of energy amplification. If your maintenance costs aren't completely trivial then you're opening yourself up to a sensitivity failure. The difference between 2% and 4% per year doesn't seem huge but over 20-30 years is big.

1.02 ^ 30 = 1.8

1.04 ^ 30 = 3.2

That's one of the reasons that people like fossil fuels so much. The amplification factor is huge and it's well known. It might take two weeks to drill a well (on land) and during that time you might use 3000 horsepower continuously (about 2MW). But if you do the math, that's only 672 MWh. A BOE is about 1.7MWh so you only need to produce 400 barrels to get ahead on the well. Add in another couple of thousand for everything else (pumps, piping, etc) and you've still got a very low bar to net energy gain.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#43

Post by greglindahl »

adventured wrote: post #36
greglindahl wrote: post #32

Earlier quoted context omitted.

Huh. Well, the only thing I can suggest is that if you want to say that, that you say that, instead of what you said. Because no, that's not obvious from what you said, and no, people don't agree with your cost estimate. No "of course" involved.

I did in fact say just that, in the comment you replied to I said: "By the time all autos are switched to electric in 30 years" You ignored what I said, and proceeded to tell me how the shift will take decades.

What the heck? That was in a different part of your comment ("tomorrow" instead of "in 30 years"), logically unconnected to what I responded to! If you meant it to be connected, then you could have made it clear.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#44

Post by URSpider94 »

rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors.

The upshot is that you can lose money on oil futures even if prices don't go any lower, and you may lose money even if prices go up, if it takes a long time for that to happen.

tl;dr -- there's no clear way to make an investment that cleanly tracks the price of oil, like there is for the Dow or the S&P 500 or the Japanese Yen.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#45

Post by tim333 »

The article's a bit melodramatic about what is everyday accounting. The price of oil always fluctuates so accountants have to use some historical price for calculating reserves so the figure will always be off at a later date when the price has moved. Pretty much anyone capable of reading and understanding the accounts of oil companies will know that.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#46

Post by peteretep »

ubernostrum wrote: post #41
peteretep wrote: post #16

Earlier quoted context omitted.

Right? The whole article seems to be based on the premise that the markets are too stupid to have done the maths, and will need to have it spelled out to them, but somehow this Bloomberg journalist has discovered a huge secret

the markets are too stupid to have done the maths Lucky for us, the markets are made up entirely of perfectly-informed, perfectly-rational, perfectly-self-interested frictionless spherical humanoids in uniform harmonic motion.

That's a straw man. If you think the markets are as predictable as you're suggesting they are, put your money where your mouth is. Otherwise, best to assume the information has already been priced in.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#47

Post by dynode »

URSpider94 wrote: post #44
rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors. The upshot is that you can lose money on oi…

Is investing in a company like exxon a good proxy for oil price?

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#48

Post by bd_at_rivenhill »

dmix wrote: post #33
rcarrigan87 wrote: post #28

I bought some shares in an oil ETF a fews weeks ago my investment rationale was: 1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF. 2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of the…

The middle east is where the vast majority of geopolitical conflict happens these days and the middle eastern powerhouses (Saudis, Iran, etc) are the ones driving the price down. I doubt they'd do this if it created a security risk internally. So I'm curious what ripple effect you expect might happen as a result of this decline? South American oil countries? Africa?

More like the Saudis are driving the price down partly in order to inflict damage on the Iranians, with whom they are engaged in something close to a cold war, but mostly to choke out the high cost producers in the US and make future investments in that sector look very risky.

There is definitely a strong destabilizing effect on Russia, Iran, and Venezuela at the very least.

Re: The Price of Oil Is About to Blow a Hole in Corporate Accounting

#50

Post by simonebrunozzi »

dynode wrote: post #47
URSpider94 wrote: post #44

Earlier quoted context omitted.

Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors. The upshot is that you can lose money on oi…

Is investing in a company like exxon a good proxy for oil price?

Not really. A company is always way more complex.
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