The global oil market is broken, drowning in crude nobody needs • Hacker News Board

Re: The global oil market is broken, drowning in crude nobody needs

#261

Post by bryanlarsen » Sun, Mar 29, 2020, 7:39 PM UTC

vikramkr wrote: post #172

bryanlarsen wrote: post #152

Earlier quoted context omitted.

In a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money. For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The S…

Most definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis producing at $10 a barrel that compete with eachother down to marginal cost. Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of go…

Marginal cost isn't a useful term if you assume infinites. If you have infinite number producing at the same price you can just say "cost" instead of "marginal cost". Marginal cost is only a useful term if each product has a different cost.

Re: The global oil market is broken, drowning in crude nobody needs

#262

Post by csours » Sun, Mar 29, 2020, 7:45 PM UTC

unlinked_dll wrote: post #259

csours wrote: post #134

It's easy to say "we live in a Just-In-Time Economy", but it's things like this that really demonstrate the implications. The supply chain is set up to flow, so when demand drops or spikes up you get a flood or a shortage. If there's a flood, some companies will go out of business, leaving the survivors with a bigger slice of the pie. If there's a shortage, companies will respond, and some will over-react and build o…

Is there any way to model a supply chain as a control system? Like what you're describing is why PID controllers exist and they do a pretty good job of preventing failure conditions.

People do, but there's too much chaos and too many individual actors making crazy decisions.

Re: The global oil market is broken, drowning in crude nobody needs

#263

Post by AnthonyMouse » Sun, Mar 29, 2020, 7:50 PM UTC

elamje wrote: post #234

AnthonyMouse wrote: post #213

Earlier quoted context omitted.

> Now would be a good opportunity make internaltional agreements to cap oil consumption and extraction to its current level in shutdown Really what they should do right now is take the opportunity to put in place a carbon tax. That would raise current prices back to previous prices, but it would also suppress demand even after the pandemic passes, so that the wholesale price stays low. You'd essentially have the tax…

I think most people forget that the American oil industry is one of the largest in the world, i.e. it employs a ton of middle and upper class labor. For that reason, it makes this a political issue. For instance, just one aspect of oil that is huge in the US is Shale production, which is not profitable at the current WTI price per barrel. What does that mean? Well, hundreds of thousands of people, or more likely mill…

> I think most people forget that the American oil industry is one of the largest in the world

You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply.

So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most of the demand because most of the people with oil jobs aren't in those constituencies. And the people who gain jobs from replacing them would be -- solar installations are inherently local. So would everyone receiving the dividend, even though part of it would be paid for by suppliers.

And it's really the same in Europe -- Eastern Europe has most of the supply but Western Europe has most of the demand. And China and India have negligible oil production per capita.

Texans can buy as many pickup trucks as they like, but if you stamp out 80% of the world demand like that, nobody is going to buy their oil. And once the jobs are already gone and the industry isn't interested in making ICE cars just for Texas and Russia and Saudi Arabia, there won't even be that.

Re: The global oil market is broken, drowning in crude nobody needs

#264

Post by qbaqbaqba » Sun, Mar 29, 2020, 8:01 PM UTC

Drowning Russia in cheap oil is an old trick.

Re: The global oil market is broken, drowning in crude nobody needs

#265

Post by Gibbon1 » Sun, Mar 29, 2020, 8:01 PM UTC

AnthonyMouse wrote: post #263

elamje wrote: post #234

Earlier quoted context omitted.

I think most people forget that the American oil industry is one of the largest in the world, i.e. it employs a ton of middle and upper class labor. For that reason, it makes this a political issue. For instance, just one aspect of oil that is huge in the US is Shale production, which is not profitable at the current WTI price per barrel. What does that mean? Well, hundreds of thousands of people, or more likely mill…

> I think most people forget that the American oil industry is one of the largest in the world You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply . So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most o…

California is about 8% of US production. Which accounts for close to half the states consumption. 197 vs 424 million barrels.

Thought of mine is as the number of electric cars increases California's oil imports will drop eventually to near zero.

Re: The global oil market is broken, drowning in crude nobody needs

#266

Post by tomp » Sun, Mar 29, 2020, 8:04 PM UTC

csours wrote: post #134

It's easy to say "we live in a Just-In-Time Economy", but it's things like this that really demonstrate the implications. The supply chain is set up to flow, so when demand drops or spikes up you get a flood or a shortage. If there's a flood, some companies will go out of business, leaving the survivors with a bigger slice of the pie. If there's a shortage, companies will respond, and some will over-react and build o…

That's mostly because politicians are stupid.

This exact scenario has happened before, with masks (I think during SARS? there was an article on HN recently) - companies were ordered to produce more, then the crisis fizzled out and the orders were cancelled, making some companies almost go out of business.

Instead, politicians should simply commit to buying said quantities of widgets, and then respect those commitments regardless of the outcomes (widgets are needed or not at all). It's unfair (and sets a bad precedent) to expect companies to take the loss for public good.

Re: The global oil market is broken, drowning in crude nobody needs

#267

Post by bilbo0s » Sun, Mar 29, 2020, 8:11 PM UTC

woobar wrote: post #166

bilbo0s wrote: post #141

Earlier quoted context omitted.

This guy understands the energy business where oil is concerned. I'd only add that the above is also the reason that the Saudi gambit to put competitors out of business is highly unlikely to work. These competitors will just sit it out until favorable environments come back around. I'm not sure what the Saudis aim to achieve? But to achieve what people are speculating that they want to achieve, they need to have some…

They want Russia to come back in line with OPEC. Russian economy depends on oil exports, and the low oil prices might force it back to table. See what happened to Russian currency when price went down.

But they aren't going to achieve that on low prices alone. That's just reality. Coronavirus has placed Russia squarely in the driver's seat here. Saudi production surplus or no surplus is meaningless as Covid is depressing prices in any case. (And will continue to do so for the foreseeable future.)

So what is the Saudi endgame? Keep prices low for an additional year after the global economy recovers from covid-19? (Which covid-19 recovery, in and of itself, could take a year?)

It just doesn't make sense unless they have some other weapon in their arsenal here. Which they might? I just don't know what it is. (But if anyone does they could make a billion right now trading.)

Re: The global oil market is broken, drowning in crude nobody needs

#268

Post by csours » Sun, Mar 29, 2020, 8:22 PM UTC

tomp wrote: post #266

csours wrote: post #134

It's easy to say "we live in a Just-In-Time Economy", but it's things like this that really demonstrate the implications. The supply chain is set up to flow, so when demand drops or spikes up you get a flood or a shortage. If there's a flood, some companies will go out of business, leaving the survivors with a bigger slice of the pie. If there's a shortage, companies will respond, and some will over-react and build o…

That's mostly because politicians are stupid. This exact scenario has happened before, with masks (I think during SARS? there was an article on HN recently) - companies were ordered to produce more, then the crisis fizzled out and the orders were cancelled, making some companies almost go out of business. Instead, politicians should simply commit to buying said quantities of widgets, and then respect those commitment…

I think that's right. I think most politicians don't care or understand, and the ones that do have a hard time explaining things like this to their constituents.

Re: The global oil market is broken, drowning in crude nobody needs

#269

Post by AnthonyMouse » Sun, Mar 29, 2020, 8:31 PM UTC

Gibbon1 wrote: post #265

AnthonyMouse wrote: post #263

Earlier quoted context omitted.

> I think most people forget that the American oil industry is one of the largest in the world You say American, but >40% of production is Texan, and the remainder are primarily low-population states like North Dakota and Alaska. Most of the demand isn't in the same states as most of the supply . So you do it in those other states, like New York or Illinois, that have people but not oil, and you can get rid of most o…

California is about 8% of US production. Which accounts for close to half the states consumption. 197 vs 424 million barrels. Thought of mine is as the number of electric cars increases California's oil imports will drop eventually to near zero.

California could probably get a carbon tax passed. Especially if it's on the consumption side and not the production side, because the demand reduction would only be from California but the impact to producers would be spread across producers everywhere in the world and not hit the California producers especially hard.

You could also just pay them off to shut up with some tax credits or something when it's a closer fight like that. It's not ideal, but destroying California's oil demand has the same outcome climate-wise whether some of the money goes to local oil producers or not. You basically tax the world oil production market to the tune of $1, of which California is less than a percent of, then give the local producers two cents out of the dollar, which is more than twice what they lost and should make them very happy.

In theory that could even work in a state like Texas -- pass a carbon tax and give some of the money to the local oil producers as compensation for the correspondingly slightly lower wholesale global oil prices, so that they have to sell their oil outside the state and for a lower price but still come out ahead with the tax credit. But then you get a lower dividend for everybody else, in proportion to how many local oil producers there are that you have to pay off, and it's not exactly a popular proposition there to begin with, so the hope of getting that through in Texas still seems pretty slim.

Re: The global oil market is broken, drowning in crude nobody needs

#270

Post by vikramkr » Sun, Mar 29, 2020, 9:12 PM UTC

hutzlibu wrote: post #241

vikramkr wrote: post #231

Earlier quoted context omitted.

Yes nobody is denying that these arent reality. They're models, and you get far more sophisticated models after econ 101

Ok. But then we are back at the beginning: "In a perfect free market the oil producers make zero profits" where this statement does not make sense, unless you apply weird economic definitions.

Right, never said that was attainable or good. The point is that some people view perfect free markets as the ideal, and this is a move towards that, so people might view the market as getting g fixed rather than being broken.