An interesting post that explains how crude is priced these days. Explains what crude "futures" are and more.

[URL]http://peakoildebunked.blogspot.com/2008/07/366-futures-prices-determine-physical.html[/URL]

And a comment explains it even more succintly:

[QUOTE]There we have it at last in plain English from JD: in oil, futures prices *are* the real prices. In principal, short sellers would serve as a brake on momentum speculators, but the small size of the crucial oil futures markets relative to the geared speculative money pouring in has sheared the fingers from the short sellers several times during this past Spring, as has been remarked in comments here, and commentary elsewhere. Without the control of shorting futures, refiners are garroted by their limited just-in-time inventories of raw oil into paying the quoted price: they can't wait, have no alternative sources, and can't short the market down. We have a forward squeeze on prices playing off the upward fundamental momentum for oil and agricultural prices of recent years, just as you say Yves, following Soros' summation.

Academic economics and market economics play by entirely different rule books. One is theory; the other is praxis. Guess which one we live by?[/QUOTE]

[quote=garo;137301]An interesting post that explains how crude is priced these days. Explains what crude "futures" are and more.

[URL]http://peakoildebunked.blogspot.com/2008/07/366-futures-prices-determine-physical.html[/URL]
[/quote]Be careful about believing JD's statements at [URL="http://peakoildebunked.blogspot.com"]peakoildebunked.blogspot.com[/URL].

I don't object to what JD said about crude futures and prices, but in earlier posts, a) JD abused the concept of Hubbert's Peak in the context of demand (to which the Hubbert's Peak idea does not apply; it's about discovery and production, not supply or demand), and b) on June 15, in post 362 of that blog ([URL]http://peakoildebunked.blogspot.com/2008/06/362-more-surplus-oil-problems.html[/URL]) JD implies the Big Lie about refineries vs. environmental regulations that I exposed in the last part of post #87 of this thread.

[quote=Peak Oil Debunked: 362.]Why is there a refinery shortage? Well, in the U.S., this will give you a clue:[INDENT]Refiners faced with rising prices for premium grades of crude oil are rushing to expand their ability to process less expensive, dirtier crudes, but their efforts face concerns about pollution and global warming.

Several expansion projects in the U.S. are being slowed by worries that the processing of heavier crudes produces more air pollutants and greenhouse gases that contribute to climate change. While environmentalists have long been critical of heavier crude, government officials responsible for signing off on expansion projects are echoing that unease and demanding countermeasures to reduce the amount of pollution.[URL="http://online.wsj.com/article/SB121322847813566247.html"][COLOR=#bb3300]Source[/COLOR][/URL]
[/INDENT]Yup, NIMBYs and global warming activists are jacking up the price of oil.[/quote]JD uses a WSJ factual report to justify implying that a refinery shortage has been caused by "NIMBYs and global warming activists".

Two good questions to ask JD are: Since there are not yet (AFAIK) any U.S. refinery expansion regulations requiring the consideration of links to global warming during the permitting process, exactly how is it that "global warming activists" are jacking up the price of oil? Or is that latter claim of yours actually unrelated to the immediately-preceding WSJ quote in your blog, and thus misleadingly placed? (I haven't read the comments section of that blog; perhaps these questions are posed to JD there. But of course I'm recommending comebacks to direct to [I]anyone[/I] blaming refinery expansion slowdowns on global warming activists.)

WSJ's "Several expansion projects in the U.S. are being slowed by worries that the processing of heavier crudes produces more air pollutants and greenhouse gases" is sorta like saying "U.S. highway projects are being slowed by worries that more accidents will occur if directional signs and signal lights are not properly planned" or, more succinctly, "Traffic is slowed by stop signs". Nothing wrong with that -- it's JD's implied connection to oil price blame-placing that is at fault.

Also, JD seems to treat "being slowed" as unhealthy. But, in relation to what? "Being slowed" in contrast to "proceeding at maximum possible pace with no regard of consequences" or "being unregulated (like S&Ls in the Reagan years, or like subprime mortgages or index speculation in oil futures during more recent times)" seems like a good idea to me!

Note that oil company representatives a) have not complained that regulations were unnecessarily impeding refinery expansion plans (also see my previous link to testimony by an EPA administrator in 2000 at the end of the [I]Clinton[/I] administration), but b) have repeatedly stated that the main problem is that thin refining profit margins [I]have[/I] constricted their economic incentives to invest in refinery capacity expansion. It's others such as commentators like JD and politicians, not oil company spokespeople AFAIK, who have promoted the Big Lie.

After scanning a few of the most recent posts, I think that JD may be so intent on debunking the hype of certain Peak Oil extremists that s/he's careless about distinguishing between some facts and fiction. So, beware.

Umm... I am not defending JD. if anything the title of his blog site screams bias. I am not interested in his general anti-PeakOil arguments or environmentalist-bashing. I am just interested if his argument about futures being the price of oil holds any water.

[QUOTE=garo;137301]An interesting post that explains how crude is priced these days. Explains what crude "futures" are and more.[/QUOTE]

W.r.to the point made in the quote you posted, I'm not so convinced by the argument about "refiners have no choice but to pay market rates." The whole idea of futures markets is to be able to hedge against future price fluctuations - usually [but not always] those in the "up" direction. Even if a refiner lacks physical oil storage capacity for [say] a year's supply of crude, there is nothing preventing him from locking in an advance purchase price in the futures markets - of course there is a premium to be paid, but the whole idea is that the premium is quite small if one hedges against the more-extreme price-swing scenarios which can make or break a business.

I was reading an article yesterday that detailed how Southwest Airlines made aggressive use of futures-market hedging in the past 5 years to hedge against jet-fuel price rises. Guess what? As a result, Southwest currently is paying a FULL DOLLAR PER GALLON LESS for their jet fuel than are most of their competition, and [unlike just about every other U.S. carrier] is still making a profit - in fact during one recent quarter they made a profit strictly from their futures-market paper trading which was 10x their operating profit. Of course that's no magic bullet in perpetuity - most of their current futures contracts expire in 2010, at which point if oil is still at or above current levels they will also have to begin paying the higher price - but for industries where keeping your supply costs within reasonable [and more importantly, predictable] bounds can mean the difference between survival and bankruptcy in a very short time frame, it seems a no-brainer. But as usual, I expect the other carriers that are hurting now were the ones who tried to save money by [among other things] not paying any futures premiums. Their shortsightedness is hurting them now.

To use an analogy near to many Californians this summer: So you built a house in a scenic-but-wildfire-prone location ... Instead of paying extra for a Spanish tile roof, you saved money by using wood shakes. Instead of buying fire insurance you used all your available funds to make the place as lavish as possible. Now that it's burnt to ground, you expect me to feel sorry for you?

I inferred two points from that post and I may be wrong but they seemed to explain oil pricing a bit better to me.

1) There is no spot pricing in oil - there is only 'futures' pricing for benchmark crudes that is used to determine spot pricing for non-benchmark grades. This is different from the futures market as you explained.

2) The production for benchnmarks is so small now that it is possible to put a squeeze with relatively little money. If I had the money I could buy up a whole load of August futures as Contracts for Difference in the London market for say Nigerian crude. Then come August hire a tanker and buy all the Brent that is available in the market driving up it's price. This would also pull up the price for the Nigerian oil for which I own CFDs since it is linked to Brent. I'll make a heck of a lot more on CFDs than I would lose storing the Brent for say one month from August to September. There is relatively little Brent in the market making this squeeze possible. If Saudi sour was the benchmark I couldn't possibly do this squeeze.

Does this sound reasonable?

[QUOTE=cheesehead;137225]
If the PV photon-absorbing material reflects most infrared, or at least doesn't let much through, then that kills the tube-heating efficiency. Even if most IR gets through, much has been scattered, so that it's not possible to concentrate it much by mirror now that the IR photons are traveling in a much wider range of directions.

But I could be wrong.[/QUOTE]
I've wondered this myself. A solar heated tube is about IR photons true; and I guess you could say that the tube is actually a transducer from radiant energy to fluid convection.
However, I am thinking about a tube that functions as a conduction to convection transducer. Solar panels get very hot I imagine and while carrying that heat away might not have the nearly the energy concentration of focused IR it would still be raising the temperature of the water within. Sure it might not be hot enough yet to extract turbine work but could be fed into a conventional solar heated tube at that point.

[QUOTE=garo;137470][I][Speculative Hypothesis #2][/I] The production for benchnmarks is so small now that it is possible to put a squeeze with relatively little money. If I had the money I could buy up a whole load of August futures as Contracts for Difference in the London market for say Nigerian crude. Then come August hire a tanker and buy all the Brent that is available in the market driving up it's price. This would also pull up the price for the Nigerian oil for which I own CFDs since it is linked to Brent. I'll make a heck of a lot more on CFDs than I would lose storing the Brent for say one month from August to September. There is relatively little Brent in the market making this squeeze possible. If Saudi sour was the benchmark I couldn't possibly do this squeeze.[/QUOTE]

Interesting - but I wonder just to what degree grades like Brent are "nonsubstitutible." At some price point I would expect all but a few customers [say ones who for some reason simply can't refine lower-grade crude at any cost] would simply switch to a lower grade ... but I'm way out of my depth here. Any folks with some background in the oil industry or the refining process reading this?

[B]Addendum[/B] - Interesting piece by Mikkal Herberg in today's [I]San Jose Mercury news[/I]:

[URL="http://www.mercurynews.com/opinion/ci_9825490"]Current explosion in oil prices stands market on its head[/URL]
[quote]The rise in oil prices has been truly breathtaking. On a single day recently, the price rose by $11 a barrel. Just a little over eight years ago, the price of a barrel of oil was $11.

The conundrum is why the law of supply and demand doesn't seem to be functioning in the way it's supposed to and in the way it did in the past. The answer has much to do with today's dysfunctional, politicized oil market.

Demand isn't slowing because so many countries are protected from high prices by politically inspired price controls and subsidies. Supply isn't rising because most producer countries have little interest in or ability to raise production. Demand and supply have become largely disconnected from prices, which helps explain why prices have careened so high and why the market doesn't seem to work.

The contrast with the past is stunning. The last major oil shock was in 1979, when prices tripled from $12 to $36 a barrel, about $105 in today's prices. In response, world oil consumption dropped by an unprecedented 10 percent, while oil production capacity outside of OPEC rose by a staggering 25 percent. By 1985, demand for OPEC oil dropped by 50 percent, which led directly to the 1986 oil price collapse.

By contrast, since 2000 oil prices have risen nearly seven-fold, tripling over just the past three years. But world oil demand has grown by only 12 percent, while non-OPEC output declined by 3 percent. In other words, since 2000 there has been a negative global supply response.

On the demand side, China, India, developing Asia, Russia, and the Middle East - the countries now driving oil demand - are insulated from high prices by energy subsidies and price controls.

Subsidies are a tool of weak governments seeking to avoid a political backlash and relying on low energy prices to feed hyper-growth economies. But subsidies blunt the demand-dampening effect of high prices precisely where oil use is least efficient and where, in a free market, the drop in demand would be strongest.

The supply side is similarly skewed. Roughly 80 percent of the world's low-cost oil reserves are in countries that exclude or severely limit outside investment and where oil is controlled by state companies with few incentives to invest in more production.

In countries like Russia, Venezuela, Mexico, Iran and Indonesia, oil earnings are siphoned off to fund lavish social spending and co-opt political opposition. OPEC has under-invested for so long that it is unable to raise production significantly. Political violence undermines production growth in Nigeria and Iraq.

As a result, production increases now trickle out from a dwindling number of countries and are largely offset by declines in older fields elsewhere.

Under these conditions, prices have to be extremely high to trigger any meaningful market reaction. Cuts in demand have to be squeezed from the richest, most oil-efficient economies, and supply increases have to be wrung from the highest cost, highest risk areas. In important ways, the market has been turned on its head.

Nevertheless, prices are so high now that a delayed but powerful reduction in demand is taking shape.

Recent fuel price increases in China, India and elsewhere show that the costs of subsidizing oil use are forcing governments to face up to market forces. Also, high prices and a slowing economy are increasingly undermining demand in the rich countries. U.S. oil demand is declining at an annual pace of 2 percent, for example.

As a consequence, the next big move in oil prices within the next year or two will be downward. Finally.[/quote]Note, however, the contrast with the last sentence of the above piece and one by the same author from 29 April:

[URL="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/28/EDTF10BCUK.DTL"]Supply Side to Blame for High Oil Prices[/URL]
[quote]...any chance for near-term price relief will depend on a substantial slowing in demand growth. But the odds on this are long. It's true that demand is now declining slightly in the rich industrial countries, and even the United States is likely to experience a small demand decline this year for the first time in 25 years in the face of unprecedented gasoline prices. The growing global economic slowdown will also reduce world oil demand growth.

However, continued strong economic conditions are likely to keep oil demand growing fast enough in China, India, the Middle East and Russia to maintain pressure on tight and uncertain supplies. So high oil prices are here to stay for at least the next few years.[/quote]

Can I just say, spare me all this bullshit about subsidies being a tool of weak governments blah blah blah. Gasoline in the US is far far cheaper than in Europe and about the same as in India.

If anything, the US has not taxed gas adequately leading to a massive underfunding of public transport and way too much driving everywhere.

China and India still consume far less oil per capita than the US and Europe. The relative consumption differences will reduce significantly over time. That's a fact and the US and Europe just have to deal with it!

[quote=only_human;137515]Solar panels get very hot I imagine and while carrying that heat away might not have the nearly the energy concentration of focused IR it would still be raising the temperature of the water within. Sure it might not be hot enough yet to extract turbine work but could be fed into a conventional solar heated tube at that point.[/quote]Yes, but the efficiency might be so much lower than in dedicated solar-heating tubes as not to be worth the cost of attaching tubes to the back of photovoltaics instead of just having a solar-warming panel sitting beside the PVs.

[quote=ewmayer;137523][B]Addendum[/B] - Interesting piece by Mikkal Herberg in today's [I]San Jose Mercury news[/I]:

[URL="http://www.mercurynews.com/opinion/ci_9825490"]Current explosion in oil prices stands market on its head[/URL]


Note, however, the contrast with the last sentence of the above piece and one by the same author from 29 April:

[URL="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/28/EDTF10BCUK.DTL"]Supply Side to Blame for High Oil Prices[/URL][/quote](* ahem *) Ah, yes -- the perils of public prognostication.

I note that Herberg did mention "speculative activity in futures markets" and "the current frenzy of hedging and price speculation" in his April article, so it may be more difficult for him to echo my excuse, "I hadn't known there had been such a revolution in the type of investor that's participating in oil futures (and commodities in general) trading."

[quote=garo;137534]Can I just say, spare me all this bullshit about subsidies being a tool of weak governments blah blah blah. Gasoline in the US is far far cheaper than in Europe and about the same as in India.[/quote]But wasn't the "subsidies" reference to China, et al., not to U.S. or Europe?