Tag Archives: Oil price

Recycling Hardly Has Barrier

Recycling can become an easier sell as prices drop. Though an article from the WSJ argued that slumping oil price pulls down cost of production, the claim is untenable when we consider this issue comprehensively. They only thought about that lower oil price and drag down the cost of producing virgin plastic. “The ramifications are being felt far and wide. In the U.S., many cities and towns pick up detergent bottles, milk jugs and other bits of household plastic and sell them to recyclers who sort, process and resell the scrap. These municipalities typically earned cash—as much as $10 a ton in parts of New Jersey—for selling recyclable materials under contracts that tie the sales price to commodities prices, with a minimum.” Many contract have been expired and replaced by a new one with lower rate recently. “‘They are definitely concerned about the possibility that they may have to pay for the materials to be removed,’ said Dominick D’Altilio, president of the Association of New Jersey Recyclers, a Bridgewater, N.J., group that includes recycling firms and municipalities.” Does this really make sense? No!

Lower oil price does not only save money for producing virgin plastic but also recycling. “Each year, 29 billion plastic water bottles are produced for use in the United States, according to the Earth Policy Institute, an environmental organization in Washington, D.C. Manufacturing them requires the equivalent of 17 million barrels of crude oil, so rising oil and natural gas prices have only exacerbated the high price of virgin plastic. “Plastics News,” a trade magazine, lists the recent price of PET virgin bottle resin pellets between 83 and 85 cents a pound, compared to only 58 to 66 cents a pound for PET recycled pellets.” Obviously, huge amount of oil is demanded to recycle plastic each year. Thus, decreasing oil price also provides a crucial opportunity for those recyclers. This should be a motivation that draw more firms accelerate their steps of recycling, which absolutely lessens the credibility of WSJ’s claim.

Another doubt is that recycling market will receive little influence from slumping oil price this time. Actually, the radical drop of oil price is a short-term case. As many countries, including US, China, some European countries, performed disappointed about their economy lately with the sanction towards Russia, oil price decreased insanely. Nevertheless, this case has little possibility to develop being a trend. Many reviving signals have already emerged worldly. Furthermore, recyclers have the natural advantage that they hold the ethics. They can shout “we recycle for humans and our future!”

Rebound of Oil Looking Less Sharp

Few weeks ago I wrote about how the price of crude oil may rebound sharply. It’s looking more and more likely that I was wrong. While oil prices will still rebound, it will be a slow one.

As I have stated in an earlier post, the current state of low oil prices is caused by a combination of falling demand from China and India, OPEC refusing to cut production, and increased U.S. production. And since the price drop, many shale drillers in the U.S. have cut production. With those in mind, plus the fact that in 2009 oil prices rebounded sharply, I believed that the same would happen again.

What I forgot to address the high amounts of oil currently in storage. With oil prices in record lows, many investors are jumping onto the oil storage game. According to an article on Reuters, traders are now purchasing oil for storage. The amount of activity in this sector have kept the price of oil futures low, no more than $60 per barrel in fact.

 

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Data on oil futures, taken from barchart.com (As of Feburary 11, 2015)

The chart above shows that futures on crude oil is being traded at as low as $63.68 per barrel, even for January 2017. That means buyers can secure crude for this price to be delivered in January 2017. This also means that traders can purchase oil at the current price of below $50 per barrel, and immediately sell a futures contract for some $60 per barrel. For those who can secure storage facilities or tankers, they can make a lot of money. But of course, this would attract more investors, which should drive up current oil prices while driving down future oil prices.

But what is interesting is that the current price of oil remained low. In fact, oil prices have dropped yet again in the past few days. (Wall Street Journal) This is because the supply of oil in the U.S. has not been cut as we were led to believe. According to the U.S. Energy Information Administration, the daily production of crude oil in the U.S. is currently at 9.2 million barrels, a number not seen since 1973. (1973 was shortly after the production of oil in the U.S. peaked) I will venture to guess that shale drillers claimed to be cutting production hoped to rouse speculators into buying more oil, thus driving up the price. But since oil drilling requires huge amounts of sunk costs, especially true for drilling in shale, these companies are reluctant to cut production after investing so much.

So as it currently is, the glut of oil will continue to grow, at least until existing oil wells are depleted. But even then, we will have huge amounts in storage. Such that the price of oil will remain low for the foreseeable future.

Russia hopes to stimulate its economy by lowering interest rates

Since last year, Russia has had territorial disputes with Ukraine in the Crimean Peninsula. Russian aggression in this region are highly disapproved by the West, has been met with numerous Western sanctions against Russia. Such sanctions include restriction to Western finance, oil technology and services, Mark Thompson writes on CNN.

And if that’s not all, plummeting oil prices, in part caused by OPEC’s refusal to cut production despite lower global demand. Has further hit the Russian economy, one that is heavily dependent on oil.

As a result, the Russian ruble has plummeted along with the price of oil.

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Picture taken from xe.com, Ruble to USD exchange rate.

 

In the early stages of the crisis, the governor of the Central Bank of Russia (CBR), Elvira Nabiullina, aiming to prevent loss of reserves, and expecting OPEC to cut oil production, allowed the ruble to fall freely, Frances Coppola writes on Forbes. But it turned out that OPEC decided to maintain its market share and maintained their oil production.

The fall of the ruble, combined with the fall of oil price, served to cripple Russia’s banking sector and oil companies. The CBR began to hand out billions in bailouts to Russian banks, however the cash fails to reach firms.

Anatoly Aksakov, president of Russia’s regional banking association and deputy chairman of parliament’s financial markets committee, said the central bank must cut rates this month to 15% from 17%, then gradually to 10.5%, the level they were at before the current financial crisis. A central bank rate of 17% meant some companies were having to pay as much as 30% to borrow.

The state media has also reported an inflation rate of 11.4% in 2014, cause in part by the collapse of the ruble as well as oil prices.

The Fisher Equation stipulates that real interest rate is nominal interest rate minus expected inflation rate. This means that a 10.5% nominal interest rate, which the CBR can achieve if it chose to, would mean a -0.9% real interest rate. A negative interest rate, which would drastically increase the velocity of money, would serve to stimulate investment activity, which would save many of Russia’s firms.

Currently, however, the CBR’s reserves are being heavily drained. Falling oil prices and sanctions are taking a heavy toll on the Russian economy and at this rate the SBR will not be able to withstand them much longer. But the question remains, how long before Russia withdraw from the Crimean Peninsula to save its economy?

Saudi vs. Shale

A while back, a restaurant opened around where I lived and immediately began to attract customers with cheap and quality buffets deals that were too good to be true. However, there was an existing restaurant in the area that also served a similar style of buffet. The two engaged in aggressive price wars and soon enough, one of them went out of business. Now, the “winner” is serving the same buffet deals with lower quality food, for three times the price. This type of behavior, where a business stomps out the competition by hurting itself at first but then reaps huge benefit of being a monopoly, is quite commonplace.

What’s happening with Saudi Arabia’s oil industry with America’s shale corporation is in many ways, similar. Well, they both serve the one same dish: oil.

Since mid 2014, there has been an oversupply of crude oil due to a number of reasons including: increased supply from shale drilling, OPEC’s decision to maintain production, and slowing growth of  oil consumption in India and China. These events have pushed oil prices from well over $100 per barrel to less than $50. Within this is the ongoing battle between Saudi Arabia, OPEC’s biggest oil producer, and its competitors, which include North American shale drillers.

In recent years, high oil prices have attracted investments into shale drilling, a high-cost production method that allow oil to be extracted from shale deposits. However, this requires oil prices to remain high in order to be profitable. Saudi Arabia’s oil fields do not require this technology, thus their oil is much cheaper to produce. As a result, Saudi Arabia has an edge should a price war occurs, and it has.

In an interview with CNN, Saudi oil minister Ali al-Naimi said he wasn’t conspiring to take out rival producers by driving down the price. But added that Saudi Arabia will never cut oil production. However, Saudi prince and billionaire Alwaleed bin Talal contradicts this in a separate interview that, one “positive side effect” of the oil crash is it will allow Saudi Arabia to see “how many shale oil production companies run out of business.” Clearly Saudi Arabia is hoping that it can outlast shale companies, which are already suffering heavy losses. It is worth noting that the oil industry is one with some of the highest entry barriers. It will be unlikely for new companies to emerge once existing ones fail. Furthermore, investors will be dissuaded from oil in fear of the current price war repeating. It will be hard for new suppliers of oil to reemerge.

On the other hand, oil consumption remains at an all time high. InsideClimate News reports that America is still a glutton for oil. Cheap oil prices have also lured consumers away from gas efficiency.

So, once the competition are beat. What kind of oil prices will we be looking at? I think it is only a matter of time before we see $200 per barrel.

In any case, that one restaurant is still always packed with customers every time I go.

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myWhen I went to the gas station in Ann Arbor last year in January, the price of gas was around $3.40 per gallon. Now oil prices have lost nearby half their value. Of course, not only myself but also other people are really happy about cheap gas price because we have extra money that we can spend on other goods or services rather than spend money for the gas. However, does it necessarily mean that cheap gas price is a good sign for economy?

Oil prices are one of the crucial factors that shape the global economy. When the gas price falls, there are winner and loser, which partly elaborate zero-sum game. The obvious winner in the decline in the price of oil is a consumer who regularly goes to the gas station. This is because the consumer gets additional money to spend on other goods and thus their spending power increases. This benefit is especially greater for low and middle-income households since gas consumptions represent a significant portion of their income.

Let’s examine the obvious loser in the continued decline in oil price. It is evident that a lot of energy companies will suffer from the drop in the price of oil. The reason is very simple when we consider the expensive cost of extracting oil. Therefore, the loss would be greater for companies that employ the costly technology such as extracting oil shale underground. In other words, oil companies are losing their profit due to higher costs that exceed their profits from selling oil. The problems exacerbate when the energy companies try to lower their labor costs as possible to minimize their loss. This is what exactly Houston-based OFS Energy Fund did and they lay off about 150 employees. Moreover, there is another negative effect for energy firms when the oil price drops, which is a decline in their stock prices. According to data from FactSet Research Systems, the market value combined of 24 energy companies lost more than $ 263 billion compared to a few years ago.

In addition, when the collapse of oil prices continues, it is inevitable for manufacturing companies to avoid a profit loss. The U.S. shale-drilling production helped Midwest manufacturing economies to boom but the drop in energy prices led them to stop producing energies and lay off 700 workers.

The impact on the global economy is both good and bad. The IMF forecasted global growth at 3.8 % for this year, as fall in oil price would lead to increase global gross domestic product. However, many experts also claim that growth problems in Japan, China, Europe and other developing countries would exacerbate global growth.

More importantly, however, it is substantial to know whether a country is a net energy importer or exporter. South Korea, Japan, China and India are net energy importers. These countries buy more energy from other countries rather than sell or export their energy to others countries. Therefore, it is beneficial for these countries since they import cheaper oil, indicating they have additional money to spend on other activities or goods. On the other hand, net energy exporters, such as Russia, Mexico, Iran and other countries that heavily rely on the revenue from oil will get a significant damage from cheaper oil prices. Eventually, it is a zero-sum game, which describes a situation in which a player’s gain or loss should be exactly same as the loss or gain of the other player.