Petroleum Update for Week Ending 2/17/06

[usair_begins_with_u]

Quite a few people are up in arms about high oil prices, yet many kick Bush over tha UAE port deal. It is really unfair given UAE's strong support for the US, particularly as a member of OPEC to supply reasonable levels of oil in the face opposition from the likes of iran, and venezuela. Military and intelligence advisors signed off on the deal, now many in congress are throwing the terror argument around as a political tool to weaken or distance themselves from bush policy.

Well, now we've (needlessly) gone and pissed off another OPEC ally. Just wait and see how they vote on production the next time those folks meet up. $60 a barrel is here to stay, and may go higher.

 

[FWAAA]

Well then Jim, wouldn't it make sense for oil companies to boost production? If they can sell all they can extract, then they are making a killing. If they add more production, market share would rise at the expense of other oil companies that are struggling.

OPEC used to be in America's back pocket. Any time supplies got tight, they opened up the spigot to keep prices flat. Why are they not doing this now? If WalMart can sell for less and make up for it in volume, then why can't the greedy oil companies do the same? WalMart has cash coming in hand over fist.

I'm confounded by the apathy that most Americans have toward oil prices. We should be demanding cheap oil, or our elected officials should be sent packing. And don't tell me our elected officials can't affect oil prices. Clinton had $14-25 per bbl oil for most of his presidency, and I'm sure he made sure it stayed in that range through political negotiation with the oil companies and OPEC.

So President Clinton is to be credited with cheap oil throughout much of his two terms? And expensive oil is Pres Bush's fault? Ooooooooookkkkaaaayyy.

Actually, I think that oil bottomed out around $10 or so at least once during Pres Clinton's terms.

As an aside, I assume you similarly credit Pres. Reagan for the huge decline in oil prices during his two terms, right? After all, it went from about $41/bbl or so in 1981 down to around $10/bbl by 1986.

"We should be demanding cheap oil"?? Why, exactly?

Do you demand cheap housing, too? I mean, why aren't you lobbying for $20k houses in Los Angeles, Boston, San Francisco and Chicago? The median existing single-family home price in the San Fernando Vally was $605k last month. That's about quadruple what it was six years ago. Where's the outrage?

Why not cheap new cars? $50k for a new Corvette is out of the question for most middle-income working families, no? Shouldn't all new 'Vettes be sold for no more than $10K? That way, even Wal-Mart greeters could afford one (here in LA, they make about $10/hr).

How about steak? I paid $10.99/lb yesterday for some whole tenderloins at Costco. Sure would be nice if they were $1.99/lb instead. Isn't it everyone's birthright to enjoy cheap filet? You make it sound like cheap oil is an entitlement.

How about Disneyland tickets? $60/day? How about $6?

What about wages? Shouldn't airlines (and every other employer) be demanding cheap wages?

Your posts make it sound like you think that enormous quantities of crude oil is stored up in easily-accessible tanks and all the oil barons have to do is turn the tap and voila - oil comes way down in price. That's not how it works.

You seem to dismiss the reasons that oil is up, way up over the last few years. A billion plus people in China are transitioning from bicycles to autos. The population in China is FOUR times that of the USA. The USA has 5% of the world's people yet we commonly hear that we use something like 25% or 33% of the world's annual consumption of oil. What do you think happens to the price when Chinese (and Indians - another billion people) begin imitating our way of life? What about when AIRLINES in China and India start looking like our domestic network? That's gonna require massive amounts of oil.

How about the former Soviet Union? During Communism (when it was still the USSR), private auto ownership was rare. Now, increasingly more common. There's another 300 million people (like another USA) to compete for the available oil. Russia has gone from a net exporter to a net importer of oil.

Let's recap: Until fairly recently, 2.5 billion people (China, India and what we used to call the USSR) were comprised mainly of non-auto owning citizens. That's changing. Combined, their population is more than EIGHT times that of the USA.

You think oil is expensive now? Just wait a few years. I fully expect to see oil at $200/bbl in 10-15 years.

I've posted before that high oil prices make me happy. And I'm a right-wing conservative, not a liberal tree-hugger. I don't belong to a union and I don't vote for Democrats because my union leaders tell me to. I drive an Escalade and really didn't care when gas hit $3.35/gal last fall. "BFD," was my response.

Don't like expensive gas? The hedge, like I do, by owning some Valero, Exxon/Mobil and Shell. I figure that my gains on oil stockholdings over the past few years will pay my gasoline bills for the rest of my life.

Sure, airlines would love to see $0.55/gal jet fuel again, which is the average price paid by AMR during 1998 and 1999. At today's fares, airlines would be rolling in money if fuel fell by two-thirds tomorrow.

But expensive oil is here to stay, IMO. And airlines can still be profitable, if only the current glut of domestic capacity can be reduced. When there are fewer seats for sale, each one can be sold for more.

Markets should ignore thugs and terrorists? That's just too funny.

 

[SoftLanding]

Couple of points:

1. To lower demand, especially from the USA, fuel $3+/gallon, as was experienced last fall. As soon as fuel prices at the pump came down, consumption started to edge higher.

2. $200 oil will help the oil producing nations, short-term, but not long term. Because of alternate energy products...

3. OPEC is will make sure prices are in certain sweet spots. It's in their interest, and in the interst of their clients. If the USA goes into a recession because of too high oil prices, who going to buy their oil?

4. China, India, you say? Who, these last few years, have been buying chinese "stuff"? If we (USA) are in a recession, who's going to pick up the slack? Remember the adage: When the US catches a cold, the rest of the world catches a pneumonia.

5. Even if Bin Laden is one day the ruler of Saudia Arabia, human nature takes over. Greed, power and more greed...(Why hasn't Iran/Venezuela already shut off their deliveries??? Something to contemplate...)

6. The question of the day is: How low is oil going to go/bottom? Somewhere between 10-70, so 35'ish...

 

[FCYTravis]

But expensive oil is here to stay, IMO. And airlines can still be profitable, if only the current glut of domestic capacity can be reduced. When there are fewer seats for sale, each one can be sold for more.

What capacity glut? Load factors are hovering over 70 percent, and there's hundreds more 150-seat jets coming online in the next decade with B6, FL and WN.

The myth that there's "overcapacity" is just that, a myth. There isn't too much capacity - there's "too much competition" (if you want to call it that) from carriers that, right now, have dirt-cheap CASMs.

US could slash PHL-SFO to two daily A320s - that would sure cut capacity out. Sure, they could do that. Until WN came in with a couple more daily 737s to OAK, built the capacity right back up and sucked those fares straight back down. Then you've lost revenue *and* market share.

The idea of cutting capacity in any significant way is moot as long as A. planes are full and B. Southwest, AirTran and jetBlue have squillions of 150-seat jets rolling off the assembly line just looking for markets to enter.

 

[FWAAA]

What capacity glut? Load factors are hovering over 70 percent, and there's hundreds more 150-seat jets coming online in the next decade with B6, FL and WN.

The myth that there's "overcapacity" is just that, a myth. There isn't too much capacity - there's "too much competition" (if you want to call it that) from carriers that, right now, have dirt-cheap CASMs.

US could slash PHL-SFO to two daily A320s - that would sure cut capacity out. Sure, they could do that. Until WN came in with a couple more daily 737s to OAK, built the capacity right back up and sucked those fares straight back down. Then you've lost revenue *and* market share.

The idea of cutting capacity in any significant way is moot as long as A. planes are full and B. Southwest, AirTran and jetBlue have squillions of 150-seat jets rolling off the assembly line just looking for markets to enter.

We disagree. I see high load factors and I conclude that fares are too low due to overcapacity - and I believe that if a legacy airline or two were to fold, capacity would be rationalized for a while. Eventually, the growth of LCCs may cause a glut of capacity again, just like now. But it wouldn't happen overnight.

You, on the other hand, see high load factors as indicia that there's not too many seats paying the profitable butts. Like I said - we disagree.

Because of high fixed costs, airlines are not gonna intentionally price their seats high when they're losing money - they're gonna price them low, so as to fill up those seats and capture any revenue they can - even if they lose money on every pax carried.

Eventually, LCCs may find it hard to attract additional customers once an equilibrium is reached: The low-fare backpacker crowd isn't growing exponentially, but the seats chasing them are. What happens once WN and B6 and FL and the others saturate their markets and can't attract any more Legacy Frequent Fliers? At that point, they'll be in trouble.

I guess we'll have to disagree.

 

[usair_begins_with_u]

FWAAA: you want to be my friend?

I'll share some more diversified oil hedging strategies with you.