Gas Prices, Peak Oil, & the Futures Market
Gasoline prices go up and down... Or at least that used to be the case. Now-a-days, they take two-steps forward, and one step back. What is the cause of this? Supply of oil and demand for oil.
Oil is traded on something called a "future's market". A "future" is a special kind of contract. For example, if you wanted to buy 1,000 barrels of oil, to be delivered in December 2008, you could. You wouldn't have to pay until December 2008. The seller wouldn't have to deliver until December 2008.
Why buy oil so early? One reason would be that you think the price is going to go up. If you buy now and lock in a price, you could save a bundle... or sell later, and make a bundle.
At this second, it would cost $72.35 per barrel to enter into that contract. In other words, the contract would cost $72,350. Luckily, you don't have to have the money until December 2008.
Well, that's not exactly how it works, so let's get a little more detail.
First off, you do have to put down a security deposit (known as a "margin"). This is normally equal to 20% of the contract. That translates to $14,470.
The next interesting thing... When the price goes up or down each day, you make or lose money that same day. The money is added or subtracted from your margin account.
If the price of that contract goes up to $73.00/barrel by the end of trading today, then $0.65 per barrel will be deposited into your account! That's $650!
If, on the other hand, the price for that contract goes down to $71.00/barrel, then you are deducted $1.35 per barrel, or $1350!
Every day, money would come into or out of your account.
If you beleive that the value of oil will be at least $100/barrel by December of 2008, then you stand to make at least $27.65 per barrel, or $27,650.
Another interesting thing about futures contracts is that you can sell them at anytime. In other words, you never have to actually have the full amount of cash. You also never have to take delivery of the oil. All you will get is the difference between your purchase price, and the sale price. You hope, of course, to sell it for more than you purchased it.
If oil did indeed go to $100, then you would make $27,650 profit on an investment of $14,470. That is 191% increase in only 20 months, or 115% per year. Would you deposit money in a bank if it gave 115% interest per year?
There is a lot of risk in the futures market. If the price per barrel were to drop to $40/barrel, you would take a loss of $32.25 per barrel, or $32,250. You would know this right away, since the money would be deducted out of your account each day. Once your deposit was down to about 10% of the value of your contract, your broker would call you and ask you to deposit more money in the account. This is called a "margin call".
The losses could be big or small, as could be the wins. The trick would be to keep one step ahead of the prices. Investing money in this way is known as "speculating".
Peak Oil expert and investor Matthew Simmons sometimes mentions that oil could go up to $300 per barrel. If you bought today, and it went to $300 before December 2008, you could sell and make... $227.50 per barrel, or $227,500.
Clearly, your profit comes from someone else who is willing (or has to) pay $300 per barrel. Who would that be? Perhaps it would be a refinery that uses that oil to make gasoline, to sell in a market where the price per gallon is "sky high". The money then comes from those who are forced to buy "extremely expensive" gasoline. Would you be okay with that? What would you do with the profits? Would you prefer that someone else make those profits?
I have to admit that I am thinking about the reasonableness of participating in this way. If price goes way up, the owners of those contracts will make bundles of money. If the choice is for someone else to make the bundle, or me to make the bundle, why not me? What difference does it make in the big scheme of things? How do I reconcile this with my value system?
What about you? Do you think it is ethical? Are you ready to start trading oil futures?
Oil is traded on something called a "future's market". A "future" is a special kind of contract. For example, if you wanted to buy 1,000 barrels of oil, to be delivered in December 2008, you could. You wouldn't have to pay until December 2008. The seller wouldn't have to deliver until December 2008.
Why buy oil so early? One reason would be that you think the price is going to go up. If you buy now and lock in a price, you could save a bundle... or sell later, and make a bundle.
At this second, it would cost $72.35 per barrel to enter into that contract. In other words, the contract would cost $72,350. Luckily, you don't have to have the money until December 2008.
Well, that's not exactly how it works, so let's get a little more detail.
First off, you do have to put down a security deposit (known as a "margin"). This is normally equal to 20% of the contract. That translates to $14,470.
The next interesting thing... When the price goes up or down each day, you make or lose money that same day. The money is added or subtracted from your margin account.
If the price of that contract goes up to $73.00/barrel by the end of trading today, then $0.65 per barrel will be deposited into your account! That's $650!
If, on the other hand, the price for that contract goes down to $71.00/barrel, then you are deducted $1.35 per barrel, or $1350!
Every day, money would come into or out of your account.
If you beleive that the value of oil will be at least $100/barrel by December of 2008, then you stand to make at least $27.65 per barrel, or $27,650.
Another interesting thing about futures contracts is that you can sell them at anytime. In other words, you never have to actually have the full amount of cash. You also never have to take delivery of the oil. All you will get is the difference between your purchase price, and the sale price. You hope, of course, to sell it for more than you purchased it.
If oil did indeed go to $100, then you would make $27,650 profit on an investment of $14,470. That is 191% increase in only 20 months, or 115% per year. Would you deposit money in a bank if it gave 115% interest per year?
There is a lot of risk in the futures market. If the price per barrel were to drop to $40/barrel, you would take a loss of $32.25 per barrel, or $32,250. You would know this right away, since the money would be deducted out of your account each day. Once your deposit was down to about 10% of the value of your contract, your broker would call you and ask you to deposit more money in the account. This is called a "margin call".
The losses could be big or small, as could be the wins. The trick would be to keep one step ahead of the prices. Investing money in this way is known as "speculating".
Peak Oil expert and investor Matthew Simmons sometimes mentions that oil could go up to $300 per barrel. If you bought today, and it went to $300 before December 2008, you could sell and make... $227.50 per barrel, or $227,500.
Clearly, your profit comes from someone else who is willing (or has to) pay $300 per barrel. Who would that be? Perhaps it would be a refinery that uses that oil to make gasoline, to sell in a market where the price per gallon is "sky high". The money then comes from those who are forced to buy "extremely expensive" gasoline. Would you be okay with that? What would you do with the profits? Would you prefer that someone else make those profits?
I have to admit that I am thinking about the reasonableness of participating in this way. If price goes way up, the owners of those contracts will make bundles of money. If the choice is for someone else to make the bundle, or me to make the bundle, why not me? What difference does it make in the big scheme of things? How do I reconcile this with my value system?
What about you? Do you think it is ethical? Are you ready to start trading oil futures?