Friday 20 November 2009

A triumph of free(ish) markets!

From a whiney-moaney article in The Daily Mail:

More than 50 oil tankers are anchored off Britain - pieces in a game in which the only winners are market speculators. The losers are the millions of British motorists paying over the odds for their petrol and diesel...

Let's crunch the numbers and then look at the facts again:

54 tankers x 150,000 tons x 7 barrels/ton = 57 million barrels
UK daily oil consumption = 2 million barrels
Hence, UK oil consumption being stored offshore = one month's worth of UK oil consumption. That seems a staggeringly large figure, but let's assume it's correct. Isn't that A Good Thing from a supply security point of view?

I've not noticed rationing and queues at the petrol station, so there's no reason to assume that they are deliberately undersupplying the UK with oil. Seeing as there is a fixed supply of oil tankers in the world, and global production/consumption is fairly constant, we have to assume that demand for oil has fallen slightly (which is why we havn't noticed a shortage), or else those tankers would have offloaded their oil and be chugging back to the Middle East to refill.

This has a disproportionate impact on the daily cost of chartering a tanker (elastic demand, fixed supply), so what's happening here is that somebody is taking advantage of the fact that it is at present relatively cheap to buy oil and store it offshore in a tanker - but from the point of view of the customer, they are doing it for free; the price they will eventually sell it for has nothing to do with how long it was on the tanker.

From here, "A super tanker [300,000 tons capacity] currently rents out at about $90,000-95,000 a day on the spot market. When hired out for a year, it can fetch daily rentals of between $70,000 and $75,000..."

Q: If you're carrying 300,000 tons (= 2 million barrels) and it's costing you $80,000 a day, by how much would the price of oil have to rise, each and every day, to make the exercise worthwhile?

A: $80,000 ÷ 2 million = 4 cents/barrel, which isn't much of a daily movement, but after six months the oil price would have to have risen from $80/barrel to $87/barrel. If evil speculators really thought that the price would go up that much (which it might well do, or it might fall back to $40/barrel, who knows?) then they could save themselves the faff and expense and just buy oil futures (which price in the storage costs to some extent, but you don't have to worry about pirates etc). And if 'Britain's hard-pressed motorists' are worried about petrol prices going up, then they can club together, open an account with a futures broker for a modest deposit and buy a few oil futures of 42,000 gallons per contract.

H/t HPC.

7 comments:

Nick Drew said...

it's even simpler than that, Mark - they aren't even speculating

just now the oil forward curve is in contango (further forward periods are more expensive than near periods & spot prices) - which is what you expect when current supplies are in surplus (though over the long term it's more usually in backwardation = the other way around - otherwise why would a producer bother to produce anything today ?)

so most of these chappies aren't even speculating - they've already arbitraged the contango (mediated by storage), sold it forward and have locked in their profit

Mark Wadsworth said...

ND, brilliant, thanks.

Now try explaining that to The Daily Mail.

James Higham said...

2m barrels a day? Bloody hell.

Adrian Wrigley said...

ND is exactly right. But it's a bit more subtle. Oil is in dollar contango because the dollar is backwardised - in other words, people expect the dollar to be losing value, and don't want to hold it. Same reason gold is at record high. Nobody wants to be stuck with dollars when the financial crisis finally hits us. Gold, Oil, Copper, Silver, Mines will hold their value better than US government pledges created by the banks.

Mark Wadsworth said...

AW, there's no such thing as "backwardation" with currencies, as the only 'storage costs' are relative interest rates, there's no seasonal demand etc.

The forward price of a currency with a low interest rate will always be higher than the spot rate, relative to another currency with a higher interest rate, whose forward price will always be lower than the spot rate.

Robin Smith said...

How does the "real" cost of oil factor in to the equation at $5/barrel ? Seems there monopoly going on here, speculation ? not sure but the ND comments seems to reinforce a monopoly activity. Why worry about what you call it.

On the Mails "motorist paying over the odds" would it surprise anyone that motorists are subsidised by up to 50% of the costs of motoring to the economy ? As Chancellor I would double the road fuel duty.

http://www.jake-v.co.uk/content/54.php

Comments on the validity of this claim ?

Mark Wadsworth said...

RS, I hotly disagree. $80/barrel = about 30p/litre. Refining and transporting costs a bit more, so maybe two-thirds of pump price is taxes.

So the real monopoly power is exercised by UK govt, who cashes in on difference between cost to supplier and economic value to motorist.

I am also thoroughly in favour of fuel duties - easy to administer, price inelastic demand so little impact on behaviour, encourages efficient use of scarce finite resources and covers direct costs of roads, lighting etc.

But it would be wildly unfair to expect motorists to pay for wider external costs (however defined) because in that case you ought to also give them credit for wider external benefits of car and lorry travel - just imagine, if they made cars and lorries illegal, the economy would be knocked back by a century.

In other words, if you increase fuel duty to account for wider external costs, you'd also have to reduce fuel duty to account for external benefits, and you'd end up subsidising fuel!!