Other factors of course but this is the main driving force. If the USD keeps falling, oil will continue to rise.

Should I keep going?

EAHINC

Part of the problem is guys see the $105/bbl price and the "sticker shock" immediatly triggers their anxiety over how much it's costing their companies per year, because the airlines don't have the pricing power on tickets right now to make up the difference.

Inflation is too many dollars chasing too few goods. The weak dollar fuels that senario. Airlines are on a different formula, with too few passengers chasing too many seats, so that even though ticket prices aren't going down in nominal terms, they are going down in real terms as the dollar weakens. In other words, ticket prices are deflating relative to oil and other costs, hence the profit squeeze and the decelerating earnings for many airlines in the 4th quarter. JP

OK, earlier you said the dollar had "everything to do with it", and I thought you were excluding the possibility of other factors affecting oil prices. Do you subscribe to the peak oil theory, for example? Limited refinery capacity? CAFE standards as being costly? etc...JP

JP,

I believe misguided monetary policy is the main issue responsible for high oil.

I subscribe to the peak oil theory in as far as it trickles into economic speculation. Investors think, Ok, this commodity is going to become increasingly scarce in a few more years. I personally don't believe it, but enough people do and investors are taking advantage of it. So again as the USD drops, oil prices go up as oil is denominated in dollars.

Investors are looking, I believe for safe haven as the global economy slows. Oil and other commodities such as wheat, corn, coal, gold, platinum and silver are very high.

As oil goes up, the more inflation will go up, the more it weakens the USD, the more oil looks like a lucrative safe investment and then thrusts oil price up even further. In my opinion, I think rates need to come up rather than go down.

This is especially evident in developing nations where I have done extensive business. Infact, as inflation has increased a few nations have been tinkering with the idea if they should move off the USD as its been a destabilizing and retarding force for their economy. I believe that would be a very poor decision in the long term for them but historically poor nations have continued to lack sound economic policy.

I think oil has gone up slightly 50 percent in Euro and over 60 percent in USD terms last year. So this explains in my opinion, why Europe has not been hit as hard as the US with an increase spread between the Euro and USD however this is going to change if the USD sinks more and contribute to a downward spiral for Europe also.

The spread between the USD and the Euro is at a maximum. If it increases further European business mainly exporters will start to seriously hurt and will contribute to this circle of economic volatility.

Oil supplies are slightly up worldwide and demand is down as the global economy slows and price is still rising? I think this can explain the wave of speculation investment rushing into the market. I would estimate speculation is responsible for 30 percent of the oil price today.

I think speculators may wake up a realize they can find a reality of oversupply and price will fall. Hopefully we will see rates increase at around the same time if not before.

As for the question you asked, yes, CAFE standards have a negative effect but I believe not as much as the weak USD and speculation.

As for limited refinery, well I'm not sure. Its true no new refinery construction has been built in the US for some time now but Exxon has increased the size of its refinery considerbly in Texas over the last decade. It has grown larger than originally built to avoid new regulations and permits to construct a completely new refinery.

Its obviously very murky global economy right now and this is just my opinion as I see it from my vantage point.

EAHINC

Oil
 

I think that we all want to believe that there is no long term problem with our oil supply.

However, there is a long list of books and talking heads coming out about the "end of oil". Add to our problems of the USD and inflation, the growth of China and India it seems inevitable that the price of fuel will double or triple over the next 5 to ten years.

One book that I read claimed that we will have oil above $200 a barrel in 2010. It also claimed that in 2008 we would reach $100. So far its predictions are right on.

As pilots our entire profession is dependent upon a free flowing supply of fuel. Demand in the airlines swings wildly with the price of tickets. In ten years from now we most likely will have a much different and smaller industry than we do today.



SkyHigh

It is not just that there have been no new refineries... How many have closed in the last 20 years! Google It! That's why I am inventing ZPE!!

Yeah! Baby!

Oh GAWD!! Puhleeze....:eek:

Peak oil theory is a myth perpetrated by oil lobbyists to gouge prices. Internal memos obtained from Chevron, Mobile and Texaco have proven this. CAFE standards while a good idea are still rooted in a woefully inadequate baseline. It needs to be raised tenfold in order to be effective. We certainly need more refineries to be built in order to up capacity. There are an estimated one trillion barrels of oil yet to be tapped under the sand box so a bit of an ample supply is out there, albeit under areas highly vulnetrable to volatility. Russia, although the second biggest exporter recently behind the Saudis is about to tap out, along with Nigeria, Chad and Venezuela. Their oil discoveries are quickly becoming a flash in the pan. No staying power with availability.
EAHINC, very intelligent post.

Ok, let's see them.


According to whom?

Three separate internal confidential memos from Mobil, Chevron and Texaco ( http://www.consumerwatchdog.org/energy/fs/) have been obtained by The Foundation for Taxpayer and Consumer Rights.
These memos outline a deliberate agenda to gouge prices and create artificial scarcity by limiting capacities of and outright closing oil refineries. This was a nationwide lobbying effort led by the American Petroleum Institute to encourage refineries to do this.
An internal Chevron memo(http://www.consumerwatchdog.org/energy/fs/5103.pdf) states; "A senior energy analyst at the recent API convention warned that if the US petroleum industry doesn't reduce its refining capacity it will never see any substantial increase in refinery margins."
The Memos make clear that blockages in refining capacity and opening new refineries did not come from environmental organizations, as the oil industry claimed, but via a deliberate policy of limitation and price gouging at the behest of the oil industry itself.


Geologist studies have repeatedly claimed there is still close to a trillion barrels of untapped oil under Saudi Arabia. Not a hard fact to come across with some mild research.

WW- Did you see the dates on those memos? Most were from 1996, 12 years ago. Oil was about what? $12/bbl? I guess they were having refinery margin issues.

Wasn't it the Shell Oil geologist Dr Hubbard that first came out with "peak oil" theory back in 1970? Made some bold predictions that turned out to be pretty accurate. Then this "Hubbard's Peak" book came out last year, outlining Hubbard's story.

Now oil's $107/bbl with the US close to recession? It's a deception? My airline shut down last year due, in part, to high fuel costs. They couldn't raise fares fast enough.

Real enough for me.

JP

Fair enough and I really enjoy this debate as you certainly have a valid point of view to offer. I'll just submit that you think that even though these practices of the major oil companies came from 1996, that it still doesn't happen today? Perhaps even MORE so?

Just as a side note, there's an area called Eugene Island, about 80 miles off the coast of Louisiana that was a large oil discovery in 1973 initially pumping out 15,000 barrels of oil which slowed to about 4,000 barrels close to 20 years later. Recently the production has jumped back up to around 13,000 barrels, spawning some research as to why. It turns out that 3D seismic imaging has showed a deep fault that has opened up releasing a gush of oil up through the rock into the existing supply thus replenishing it. Now call me crazy but I would venture a guess that this isn't the only place on Earth that this is happening, we just haven't had the time or resources to monitor this phenomena at other sites. Pretty much makes the peak oil theory antiquated logic.

FYI:

The initial theory behind what is now known as the Hubbert curve was very simplistic. Hubbert was simply trying to estimate approximate resource levels, and for the lower-48 U.S. he thought a bell-curve would be the most appropriate form. It was only later that the Hubbert curve came to be seen as explanatory in and of itself, that is, geology requires that production should follow such a curve.

Indeed, for many years, Hubbert himself published no equations for deriving the curve, and it appears that he only used a rough estimation initially. In his 1956 paper, in fact, he noted that production often did not follow a bell curve. In later years, however, he seems to have accepted the curve as explanatory.

Hi,

Yes, I think this is a good debate. Nice to see people are actually interested in this stuff. :)

Its easy for people to get emotional and blame greedy oil execs, India or China or the peak oil theory or whatever as the primary responsible party. Those all all valid arguments, however I will never agree with them.

As I've stated before, I believe this has very little to do with geology and far more to do with liquidity and monetary policy and a healty mix of human psychology.

Anyway, for what its worth, one of the best indicators for the last 3500 years regarding disturbances of commodities prices is the price of gold. If gold is below 300 ounce (USD) things start going astray. Above 400 ounce to 450 ounce things again start reaching the weird on the other end of the scale.

If below 300 ounce we will find a rapid tightening up of commodities. This happened in the decade of 1990. Oil plunged to around 11 USD, farmers were going bankrupt, people and politicians blamed the large food processors and such as a deflationary track was put into effect.

What did these investors do? Where did they put their money? They put their money into a new and growing industry called Tech/Dot Com. this started the tech bubble. It can be described as a process of creative destruction. Someone wins, someone looses. Financial extinction is the way many have and will continue to meet reality. This is how the free markets work in the real world. Believe me! It gets very messy and is hardly ever representative of smooth consistent quarterly growth.

Now take gold 400 ounce and above and we start experiencing commodities inflation. This is obviously where we are today. I don't see why this is so difficult to understand. Precious metals, International trade and shipping rates start to increase. We start experiencing a slow down in general economic activity. What do investors do at this juncture? Do they run and hide their money under the mattress? Nope, they start speculating because inflation fosters and procreates an environment of speculation.

The Central Bank has screwed up more times than I can remember. You would be hard pressed to find a real world, non-governmental economist or any large business organization defending the Feds. The Feds primary duty is to maintain the integrity of the currency and avoid panic. They often fall short.

Like I said before, I believe we need rates to slowly reverse over the long term, spread over several years. You will be seeing more economist discussing exactly this in the next few months if things don't improve. The Fed historically is realiable in one thing, this is... they always arrive late and fall short of tackling economic upsets before they spread into other sectors of the economy.

Of course the best sistuation in my opinion would be for the Fed to stop manipulating interest rates, however this won't happen anytime soon. The printing press is at full throttle and this leads to higher prices for everything including OIL. The people who run the government in America or governments abroad cannot face the temptation to create money.

Lastly, I believe but I'm not sure the USD was allowed to be redeemable into gold back in the 1930's. After that time, the presses have been at the mercy of the politicians. Inflation and the threat of inflation is something we can deal with now!!! We cannot deal with a "peak oil" situation. That is out of our control. We can start improving the situation today by having sound monetary policy! If the CB cannot correct the problem then surely things will get worse.

I would like to acknowledge all the people who thought they were intituled to a home even if they could not afford the purchase, for it is for those geniuses that got us to this situation.

EAHINC

Great post EAHINC.I totally agree,oil supplies in the US are at an all time high.Obviously supply and demand no longer controls,rather some dichotomy of speculation,safe haven,ROI in hedge funds,weak $ and who knows what else. I don't know about the rest of ya'll but I'm tired of living in interesting times.

The law of supply and demand has not been suspended, but as always prices are influenced by market perceptions. It is all about what people believe about the future.
A similar concept to watching people rush to the grocery store for essentials just prior to a storm.
There are many similarities between the current situation and the oil embargo of the 1970s and many differences.

What we are seeing is a greater demand for oil, limited world supply or production capability and a simultaneous drop in the value of the dollar.
Look for more inflation, slow or no rise in wages and eventually a reigning in of what has been a very long period of fiscal excess by our government and consumers. Other countries are not immune, it is just that the dominoes haven't started falling yet, for they too have their excess'.

Just as in the 70's this won't happen over night, we are still feeling the economic impact from the last oil crisis.

The whole concept of managing fiat currency in the correct manner is, as near as I can tell, understood by few or no humans. It is a fairly recent development and full of pitalls, the most obvious of which as another poster pointed out, is controlling the supply of money. Back to that old devil-supply and demand. My guess is that we will see a fairly strong deflationary cycle before it is all over, something already started in the housing and stock markets and one of the rarest events in a fiat currency economy.

There is no need to look under rocks for conspirators, for as always we(mankind, governments) have managed to screw things up through our own mistakes far worse than any targeted conspiracy would dream of under the circumstances.

As long as we have an administration that believes the dollar should continue it's southerly plunge, we're all gonna be screwed. The US oil supply is fine and demand is down, but you sure don't see prices falling. Gold, platinum, and the Euro are jumping to new highs every day and not a darn word out of our government to try and stabilize things. Oh, I forgot, some taxpayers are getting a pittance back in the form of a rebate.............and they'll have to claim it as income and be taxed on it when filing their taxes. What a joke. :rolleyes:

The oil supply in the US may be fine, but that still doesn't mean demand isn't rising in the rest of the world. Politicos cannot control the world market price of oil, gold, platinum or the euro. Politicos may also have trouble controlling the value of their home currency because much of that value is dependent on the buyers opinion of the stability and solvency of the economy that issues the currency.

It is useless to blame any one administration for this, it has been an ongoing problem for a very long time and will continue to trouble us as long as governments insist on spending vast sums of money they don't have.

Many people still have trouble with the concept that governments don't create wealth, they can only confiscate and redistribute it. That is why it is so important to preserve the dynamic US economy- it is ultimately the source of our strength and status in the world.

Up $3 a bbl today...........crack spread up to $132 a bbl for jet fuel. I suspect we'll see airlines either collapsing or cutting back severely since they can't keep up with this insanity. Hope whoever is promoting this upward spiral is happy with the outcome...............personally, I think it's going to cause a LOT of problems in the USA (the stock market is already in trouble and I sincerely believe these idiots who say this isn't a recession are smoking dope or something close to it). Pretty soon a revolt is going to happen and it ain't going to be pretty. If I was an oil company exec, I'd get ready for some incredible profits, followed by massive outrage. I think Americans are getting tired of this...........................:mad:

Hi there ewr,

Thought I would type a quick response to your post.;)

I'm sure you understand the stock market is not the economy. Its only one of several instruments which may sometimes lead to an accurate diagnose of the economy.

Stocks rise and fall for a variety of cause and effect reasons on a daily basis. Economic growth, prospective growth, unforcasted higher corporate earning all complicate the situation. I don't focus on the daily rise and fall of the market. You would be looking at the wrong numbers if you do. Look at the market performance over the last 20 or so years. Are things better now than back then? The next 20 years will be no different!

Companies, industry and commerce are run by people of vast diversity from one another in leadership, organizational management, discipline, vision, skill, insight and personality style like in everyday ordinary people. Its this diversity however that leads to stronger and weaker performers in terms of profitability.

If the aviation industry and general economy is to flourish and achieve maximum efficiency and long term growth from use of its most expensive resource OIL/FUEL then there must be a way to cripple and weed out the most weak of companies who do not adapt. This is a good thing. Airlines need to man up and start getting it together.

Nothing new here, owners/managers who do not get the most from those limited resources will face financial decapitation. Bankruptcy, losses and sometimes mergers accomplish this process and unfortunately people get laid-off but eventually get re-hired, retrained or of course retire.

If a business is falling short and failing to be competitive for whatever reason, is producing a product that is not desirable in the marketplace then the company will show a loss. Management and sharholders will rethink the decision making process, quality, policies and shake it up and change direction. If the sharholders aren't receiving dividends as forcasted then the CEO and others will be shown the emergency exit door.

Profits and losses work as a team in a never ending free market economy to replace weak management or weak products. This process evolves as a never ending circle, companies and entire industries will become more efficient. Achieving this level of never ending efficiency is paramount to the survival of airline or a hot dog stand. All the same.

If an airlines haults operations because of higher oil or other poor management decisions/gimmicks then obviously the management wasn't up to snuff and unfortunately hard working employees get hurt. Can't put blame on Exxon, Shell, or Halliburton for that one. It's your own airlines management fault at that point.

Lastly, I see absolutely zero evidence of an up and coming dark age of dire economic activity for the USA or the global economy.

I see just the opposite! With short term aggressive monetary policy changes, an oil industry speculators reality check combined with the advent of new technology/engineering in the next several years will have a huge positive effect on aviation and the oil industry in specifically.

Call me a capitalist idiot (Your words,)for not subscribing to the doom and gloom economic forecast but I'm seeing oil plunging 30 USD long term and taking a bunch of speculators with it to the poor house.

They zig, I zag! You will seldom find wealth following others.

EAHINC

Perhaps those "idiots" don't think we are in a recession because they know what the definition of a recession is.

'The official definition of recession is when GDP growth is negative for consecutive two quarters or more. However, you can feel like you are in a recession before it has officially started because it is usually preceded by several quarters of slowing but positive growth. It feels like a recession when GDP growth slows....'

Reference: http://useconomy.about.com/od/grossd.../Recession.htm

To the Bush Admin haters:

I don't believe Bush invaded "the Iraq" and "everywhere like, such as", for the oil because we are not seeing any of that stuff back in the states. If we were getting all that Iraqi oil I think gas prices would be considerably lower. Right???:confused:

good god you're dumb

Hmmmm........let's see, the richest man in the world, Warren Buffet, said we were in a recession the other day regardless of what economists and the "experts" are saying. I think I'd believe a guy like him over Bernanke any day. ;)

Maybe YOU think I am, but my credentials say otherwise. I served 20+ in the military (and you???), have a masters degree with honors, graduated with honors from military flight school, graduated #2 in my US Customs training class out of 20, and seem to be doing fairly well in my airline career. And you? BTW, good should have a capital g, God should be capitalized, and their should be a period after the word dumb. Not as smart as you thought you were, are you? :eek::rolleyes:

I have two PhDs, a law degree, was voted Pilot of the Century over Chuck Yeager, drive a Bugatti and am dating both of the president's daughters.

hey, this is fun! :D

....... Do you seriously think we'd be in Iraq if they grew wheat? :eek:

But it looks like you're inhaling...........so I don't believe you!!!:D

...and you are giving grammar advice? .;)

I was going to put "they're", but wanted to see if anyone "wood" (:p) catch it. Touche!!! ;) For some reason "there" didn't look right.........LOL