Tuesday, December 02, 2008

Financial Crisis Dec 01 2008 : Petroleum Price

Financial Crisis Dec 01 2008 : Petroleum Price
Andre Willers

31 Nov 2008

OPEC target price announced at 30 Nov 2008 .

$75 a barrel .

See the price per barrel calculation below in Appendix A . This includes very generous margins for profits , reserves and prospection reserves .

I did not expect actual figures to match my theoretical figures so closely and so quickly (5 months) , unless somebody else is reading my blogs , or my estimates are close to what others will do .

So , here is here is an update after appreciation of the dollar :

Basic ab-initio Cost Estimate of Petroleum Prices at 30 Nov 2008 .

Oil per barrel at the well-head : $5

Transport per barrel anywhere on-planet : about $5

Total cost per barrel at refinery : $10 =(5+5)

Markup factor about 200% : cost per barrel about $30= (10+2*10) . This is the historical markup . Also the optimal markup . See http://andreswhy.blogspot.com "Optimal Markups"

To pay for the infrastructure of refineries , garages , etc

The system needs reserves if it is not to die on us .

As discussed (See http://andreswhy.blogspot.com "Infinite Probes" )

There are two schools of thought :

1. General Reserves of about 1/3 of this gives cost per barrel about $40 = (30*1/3+30)

2. But we need reserves for exploration , which is expensive .

We use the optimal markup factor of 200% on $30 to $40 .

This gives us price boundaries of $60 to $80

What does this mean ?

The system can live with oil at $40-$50 a barrel , but exploration is severely curtailed. Long term oil prices will rise sharply due to supply constraints . The figures might seem dry , but they translate into hundreds of thousands of lives lost in oil-wars.

Arctic oil-wars become a certainty .

(Note that the artificial depression of oil prices to about $10 a barrel two decades ago made the Middle-Eastern wars nearly inevitable . )

A price of $75 seems a reasonable compromise .

This is a Cost-plus-profit model , not Everything-the-market-will-bear .

The new , Social-Capitalist model . Inherently more stable .

From http://andreswhy.blogspot.com "Money : Human growth Rates"

FaceBookism (old WallMart) fluctuates between 22% and 67%

Social-Capitalism (China) fluctuates between 7.4% and 22%

Pure Capitalism (USA) fluctuates between 2.5% and 7.4%

Pure Socialism or Feudalism (Cuba) fluctuates between 0.8% and 2.5%

Third-world countries will tend to the Pure Socialism model (like SA) , decreasing their growth-rate drastically .

The USA is capable of skipping to FaceBookism , exploding their growth rate to a minimum of 22% . But can they get rid of the baggage of Capitalism ? The old WallMart did . So the capability is bubbling up . It is a bubble-technology . China can do the same by designating a new province to bubble-up in FaceBookism . So can Singapore or India or California .

Things are just about to get more interesting .

Oilily yours


Appendix A :


I quote from previous post "Petroleum Price: dated 4 /7/2008.

See http://andreswhy.blogspot.com "Petroleum Price"

" The Oil-bubble .

This leads to a bubble .

Some very approximate figures are instructive .

Oil per barrel at the well-head : $5 - $10

Transport per barrel anywhere on-planet : about $5

Total cost per barrel at refinery : $10 - $15

Profit about 200% : cost per barrel about $40

Reserves for exploration about 40% of this gives cost per barrel about $56

Reserves for exploration about 100% of this gives cost per barrel about $80

The price at selling point (note globalization effects) at 3 July 2008 is about $145 .

This is a zero-sum game , so where does all the money go ?

Well , at the present moment it is not going anywhere because it only exists as potential money (raw oil) . An awful lot of tankers are sailing in slow circles .

The volume of money transactions are low because of the hoarding effect . There is a lot of masking wash in the futures markets .

The bursting of the present oil-bubble .

The question is at what price . Inventory of physical product cannot be hoarded forever , especially if national legislatures are sniffing around . An upper boundary of $160 =2x $80 seems reasonable . A very sudden collapse down to about $50 , then a rise to $80 per barrel seems likely . Stock markets will rebound in sympathy . "


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