Comments on: "Power Failure on Wall Street" http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: HoosierDaddy http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8544 HoosierDaddy Sun, 25 May 2008 22:51:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8544 Retread, I was responding to Anon's post about the tar sands, which summed up<br/><i>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> Retread, I was responding to Anon’s post about the tar sands, which summed up
So the current total cost to produce a barrel of oil from the Athabasca sands is $105.77, allowing a reasonable return on investment.

]]> By: retread http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8519 retread Sun, 25 May 2008 02:38:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8519 Hoosierdaddy, <br/><br/>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:<br/><br/>http://investingforincome.blogspot.com/2007/10/goldman-sachs-on-price-of-oil.html<br/><br/>Now new sources cost more, that's why they aren't in use now.<br/><br/>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:<br/><br/>"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.<br/><br/>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.<br/><br/>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."<br/><br/>There's more, see<br/><br/>http://www.ft.com/cms/s/0/ad770a0c-8c7d-11dc-b887-0000779fd2ac.html 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

]]> By: HoosierDaddy http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8514 HoosierDaddy Sun, 25 May 2008 01:12:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8514 What I worry about is if both the fundamental demand/ marginal cost of production case laid out by anonymous at 14:19 and 14:39 and the Speculation meme brought up by Richard (and M. Masters) are accurate. <br/><br/>So lets say the marginal cost of production for a barrel of oil today is $105, however due to Speculative demand on the futures market we hit $150 this year. Then the bubble bursts and the price overshoots to the downside as everyone runs for the exits. Do the projects we need to come online to meet demand 10 years out get scotched because of the collapse in prices? The IEA is already turning pessimistic on the prognosis for new projects coming online in the next few years. What happens to prices once they find equilibrium again with less future supply? Bet the marginal cost after a 2 year hiatus will be higher.<br/><br/>I grew up in the oil bust and remember wells we would love to have now being filled with concrete. What I worry about is if both the fundamental demand/ marginal cost of production case laid out by anonymous at 14:19 and 14:39 and the Speculation meme brought up by Richard (and M. Masters) are accurate.

So lets say the marginal cost of production for a barrel of oil today is $105, however due to Speculative demand on the futures market we hit $150 this year. Then the bubble bursts and the price overshoots to the downside as everyone runs for the exits. Do the projects we need to come online to meet demand 10 years out get scotched because of the collapse in prices? The IEA is already turning pessimistic on the prognosis for new projects coming online in the next few years. What happens to prices once they find equilibrium again with less future supply? Bet the marginal cost after a 2 year hiatus will be higher.

I grew up in the oil bust and remember wells we would love to have now being filled with concrete.

]]> By: Juan http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8511 Juan Sun, 25 May 2008 00:46:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8511 Richard, very well put. Richard, very well put.

]]> By: Richard Kline http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8495 Richard Kline Sat, 24 May 2008 09:08:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8495 So Moe and Shargash, there seems to me a fundamental misconception of what demand really constitutes here. _Whose demand?_ That's not a trick or silly question. Demand of those using petroleum derivatives is not directly linked to producers' supply, it's linked to the supply controlled by futures' buyers. Now, were producers' supply and consumers' demand truly elastic, middlemen get whipsawed. Since as we see consumers are increasingly inelastic (and some of them are subsidy buffered from price), and producers' supply is tight and more subject to downbounce niggles than upbounce new production, the real demand in the process IS FROM FUTURES BUYERS. If they pay more, the ultimate consumers have very little option but to pay more on the cost pass through unless the price level in futures fragments. And that is in the interest of _no one_ buying futures contracts, and very much against the open interest of those buying with leverage in bulk. Demand in the equation is a function of middleman demand at this point. And _that_ is the definition of speculation, whether bubble level or not. So Moe and Shargash, there seems to me a fundamental misconception of what demand really constitutes here. _Whose demand?_ That’s not a trick or silly question. Demand of those using petroleum derivatives is not directly linked to producers’ supply, it’s linked to the supply controlled by futures’ buyers. Now, were producers’ supply and consumers’ demand truly elastic, middlemen get whipsawed. Since as we see consumers are increasingly inelastic (and some of them are subsidy buffered from price), and producers’ supply is tight and more subject to downbounce niggles than upbounce new production, the real demand in the process IS FROM FUTURES BUYERS. If they pay more, the ultimate consumers have very little option but to pay more on the cost pass through unless the price level in futures fragments. And that is in the interest of _no one_ buying futures contracts, and very much against the open interest of those buying with leverage in bulk. Demand in the equation is a function of middleman demand at this point. And _that_ is the definition of speculation, whether bubble level or not.

]]> By: binaryoptions http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8490 binaryoptions Sat, 24 May 2008 05:34:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8490 <b>Roger Said:</b> <i>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.</i><br/><br/>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.<br/><br/>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. 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.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8489 Anonymous Sat, 24 May 2008 02:43:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8489 Thankyou Tom for clearing that up Thankyou Tom for clearing that up

]]> By: tom a taxpayer http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8488 tom a taxpayer Sat, 24 May 2008 02:24:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8488 Thanks, Moe, shargash, and anonymous, for your insights on oil markets. <br/><br/>To 8:35pm poster: Memorial Day is observed this Monday Thanks, Moe, shargash, and anonymous, for your insights on oil markets.

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

]]> By: Anonymous http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8484 Anonymous Sat, 24 May 2008 00:35:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8484 This is a bit off topic, but since you mentioned it, and I'm not an american - is memorial day this weekend or next weekend ? (wikipedia says 30th of may. This is a bit off topic, but since you mentioned it, and I’m not an american – is memorial day this weekend or next weekend ? (wikipedia says 30th of may.

]]> By: Juan http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street.html#comment-8476 Juan Fri, 23 May 2008 20:44:00 +0000 http://www.nakedcapitalism.com/2008/05/power-failure-on-wall-street/#comment-8476 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.<br/><br/>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.<br/><br/>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'. 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’.

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