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Energy Investing
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Supply / Demand Curve in Control of Price of Gasoline and Diesel - not ExxonEconomics 101 introduces the law of supply and demand. In free markets, if the supply is less than the demand at the current price, the price of the product increases. If the supply at the current price exceeds the demand for the product, the price will decrease. In a non-free market system, if the supply is less than the demand at the current price and the state freezes the price, then the supply does not increase and there is an artificial state-imposed shortage. If Exxon wants to increase oil production instead of providing dividends or share buybacks to shareholders, shareholders will sell the shares reducing the price of Exxon stock. Exxon's ability to rapidly invest are limited. USA offshore or Alaska with major new projects? Can't do it - USA government actions make it impossible. How about Canada? Nope. USA government canceled the Keystone Pipeline. What about on leases in the continental USA? Nope. Can't do much quickly as USA pipelines are full and it is hard to get new permits to build them. Also, any major new project would be 5 to 10 years from initial investment to first drop of new oil. The only places to rapidly develop new production (with relatively quick turn arounds) would have been in places like oil sands area in Canada - but the Keystone XL pipeline was canceled so who would do new projects there without getting the pipeline to transport the oil approved and close to finished before investing? What about investing in Venezuela? There is a lot of oil there - some of it can be produced fairly quickly. Answer - Venezuela is ran by thugs - and no agreement there can be trusted. So, no one will invest new money there. In the end, looking at what can be done, there are relatively few huge new projects that can be attempted that would have a major impact on future oil production. Most of the projects would take a decade of investment before getting nice returns. There are a number of such in the USA deep offshore - but right now, the USA government blocks them. Other countries have some as well - but companies are worried that their work after a decade of investment will just be nationalized. Given the current political changes in the West, the companies realize that if their investments over a decade were nationalized, that it is unlikely Western governments would 'back them up'. Given that the USA government wants Exxon and other large companies to drill more and invest more instead of returning money to shareholders. But the USA government has put off-limits the best projects that are offshore or in Alaska and ruined the near-term chances in Canada by making it impossible to send Canada oil through the USA via pipeline to refineries. Nor can USA oil and gas companies trust the USA government if they do make concessions or say they can drill or lease something. The politicians are not trustworthy and have already indicated that they will 'end fossil fuels'. Therefore, the intentions of the politicians are known. What about oil and gas companies simply lowering the price of the oil that they sell? Well, the law of supply and demand indicates that if this were done, the lower cost supply would sell out. Since the price were lowered 'artificially' and not because new supply exists, it would not change the supply/demand curve. The lower cost supply would most likely be purchased and much of it brokered and sold for a higher price. The new 'middleman' who notices the lower priced supply and buys it up to resell it would end up making the profit that they oil company gave up by selling their product at a lower price. Some think that this would not happen. But everywhere that the prices were lowered artificially below the real market price, the above is exactly what happens. In Venezuela, the government tried to keep the price of gasoline very low for the citizens. The end result was that lines to buy gasoline became longer and longer because people were putting in very large gas tanks. They would fill up the tank, drive somewhere and pump out the low-cost gasoline which would then be driven to a country with market-based gasoline prices like Columbia where the gasoline was resold. Eventually, the 'brokering' schemes of many people in Venezuela broke the government distribution system of gasoline and diesel in Venezuela. The profits went to many small businesspeople and various gangs and gangsters. |
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