naked capitalism

rahuldeodhar says:

Dear Madam,

Does it seem to you that this is indicating a threshold for “real” capital in the world?

And since we have created excess capital – it manifests itself in two ways.

Part of the capital that has managed to permeate through the income classes shows up as inflation. Thus the value of the capital is reduced.

Part of it still with the top income class – manifests as increases in prices of asset classes – to the extent this class decides to invest. So when these burst there is capital destruction reducing total capital in the world!

It is as though these tools are systematically un-doing our excess capital creation.

Rahul

Anonymous says:

It’s just complete b.s. that there is no fundamental yardstick of value for commodities. Take oil, for example, which is the commodity I know the best. If you want to increase supply at this point, it means things like difficult deepwater wells and production costs of $90 (and that was the cost a few months ago–it’s surely higher now). Add a profit to that and you’re talking a base price of roughly $100 unless you cut demand to the point that you don’t need this expensive deepwater production.

Now you add up demand and you add up supply and you see where you are. At a base price of $100, every 1% of demand greater than supply is worth roughly $15–that is the price rise it takes to knock out that 1% of demand. That number has been going up, by the way, not down. It’s taking more and more of a price increase to knock out 1% of demand, probably because the users who are left have more money to compete for the product, and because efficiency is up since the 70s and continuing to rise, so we get more bang out of the oil we buy, making it worth paying more.

There are a number of ways to calculate demand to confirm that the price is pretty close to reality–the IEA, for example, uses models based on the number of cars on the road, the number of power plants that burn petroleum products, mile of new highway constructed, etc. The number of cars on the road in China, India and Russia has been soaring. Russians are moving out of the city to new suburbs. China is building highways, yada yada yada.

So, no way we’re in a fog. Do you really think that oil companies are making decisions about long-term investments in expensive, high-risk production completely in a fog?!?!?!? Au contraire.

The average consumer may be in a fog, and the average blogger or Bloomsberg columnist may be in a fog, but not the oil companies and not good oil traders.

And you can expect Asian fundamentals to decline all you want, but until the markets actually see it happening, they’re not going to bet on it.

Moe Gamble

Jon Brezon says:

Something like a bubble in commodities occurred with cotton in the 1850’s. The price of cotton rose steadily even in the face of increased production, peaking in 1858 (I think). In the final stages something like a buyer’s panic set in, and when the Civil War started the average English cotton mill had a 21 month inventory of raw cotton on hand. The profits accruing to Southern cotton producers was a major cause of their hubris going into that war. Ironically, those large inventories in England were also a major reason why that country was relatively immune to Confederate diplomacy and efforts at economic blackmail. See James McPherson’s “Battle Cry of Freedom”.

Anonymous says:

Moe Gamble said:

“It’s just complete b.s. that there is no fundamental yardstick of value for commodities. Take oil, for example, which is the commodity I know the best. If you want to increase supply at this point, it means things like difficult deepwater wells and production costs of $90 (and that was the cost a few months ago–it’s surely higher now). Add a profit to that and you’re talking a base price of roughly $100″

Moe,

One thing I have noticed in this debate is the amount information that is false, and easily proven to be false, that somehow manages to make its way into the discussion. And not just in web discussions, but published in some of the nation’s leading newspapers and magazines.

I’ll cite just one example. In my exhaustive reading on the subject during the past month or so, numerous commentators have stated that oil can be extracted from the Athabasca tar sands in Canada for $40 or $50 per barrel.

Now that is a figure that is fairly easy to check. All one has to do is go and take a look at the latest financial statement of one of the major players in the oil sands, Suncor Energy.

What we find is that in 1Q08 Suncor’s oil sands segment produced 248,000 BOPD or 22.5 MMBO. Operating expenses for the three month period were $1.274 tillion dollars, or $56.45 per barrel.

Also, during the first quarter, its board of directors approved an expansion in capacity of 200,000 BOPD to be completed in 2012. The cost is estimated at $23.98 billion dollars, or about $120,000 per BOPD of added capacity.

That’s an investment of $120,000 to make 365 barrels of oil per year. If the investors want a 15% rate of return on their money, that’s $18,000 per year or $49.32 per barrel.

So the current total cost to produce a barrel of oil from the Athabasca sands is $105.77, allowing a reasonable return on investment.

I think we have a large number of energy analysts, perhaps even a majority, who 1) don’t know what they are doing or 2) will bend the facts to make whatever point it is that they want to make.

Juan says:

Rahul, yes, that could be called an overproduction of fictitious capital which, contrary to its owners beliefs, can never be fully disconnected from surplus value creation in the real, productive, parts of the economy. Sure, as even the Minneapolis Fed mentioned in its 1974 annual report, credit can act as a substitute for wages and capital investment. But a ’substitute’ which, with its accumulation, can only but contradict itself and must unevenly give way.

Differently, a rentier capitalism can only progress so far; as with other forms of capitalism, limits demand/generate their overcoming but as claims to value increasingly gap away from that available and as substitution hits more difficult barriers, the rentier form fails. Price retreats to value which has less to do with physical supply/demand than the production of supply and labor productivity of such. Rising productivity can reduce unit value even as unit price rises.

Yes, far too conceptual, even 19th century, but then I’m not of the opinion that neoclassic econ has earned more than, perhaps, a ‘C’ curving towards an ‘F’.

tom a taxpayer says:

Thanks, Moe, shargash, and anonymous, for your insights on oil markets.

To 8:35pm poster: Memorial Day is observed this Monday

binaryoptions says:

Roger Said: Really, you get a price on a barrel of oil by the same method that you get a price on a widget – you learn how much it costs to produce one, firstly. On the other hand, cost of producing a piece of paper on which is written “stock certificate” is close to zero.

Great observation. Ironically, producing oil futures contracts, derivatives — certificates, if you will — drives up the underlying current spot price. This is were fundamentals separates from value.

The only difference between a futures and a spot is storage, transporation, insurance and borrowing costs. Anything between is an arb profit. Regardless of what’s causing Oil to rise, if the futures are rising, the spot has to rise by arb theory alone.

Juan says:

Richard, very well put.

retread says:

Hoosierdaddy,

Where did this marginal cost of production is $105 come from? Goldman, who we all know is bullish, says here the marginal cost is $70:

http://investingforincome.blogspot.com/2007/10/goldman-sachs-on-price-of-oil.html

Now new sources cost more, that’s why they aren’t in use now.

Brazilian ethanol (using sugar?) is also cheap but it is controversial, and probably not enough to have a huge impact. This is probably way too bullish, but it was in the FT:

“First, technology is bound to deliver a biofuel that will be competitive with fossil energy at something like current prices. It probably already has. Brazil has been exporting ethanol to the US at an average delivery price of $1.45 for an amount with the energy equivalence of a gallon of petrol. It is doing so profitably and in increasing amounts, in spite of a 54 cents a gallon tariff to protect American maize-based ethanol producers. Many countries are following suit.

But ethanol is an inconvenient chemical compound that is corrosive and soluble in water, thus limiting its immediate market to that of a gasoline additive. However, this is just the Betamax phase of the industry. There is plenty of private venture capital money being poured into finding more efficient ways of extracting energy from biomass and delivering it to transport and power systems. Over time, the technology will also become more flexible, allowing more crops to be used as feedstock, not just the current choice of sugarcane, maize and palm oil. New technologies will be able to extract energy from cellulose, allowing the use of pastures such as switch grass as well as the refuse of current food production. The cheque is in the mail.

Second, the world is full of under-utilised land that can grow the biomass that the new technology will require. According to the Food and Agriculture Organisation, the world has a bit less than 1.4bn hectares under cultivation. But using the Geographic Information System database, Rodrigo Wagner and I have estimated that there are some 95 countries that have more than 700m hectares of good quality land that is not being cultivated. Depending on assumptions about productivity per hectare, today’s oil production represents the equivalent of some 500m to 1bn hectares of biofuels. So the production potential of biofuels is in the same ball park as oil production today.”

There’s more, see

http://www.ft.com/cms/s/0/ad770a0c-8c7d-11dc-b887-0000779fd2ac.html