When oil prices spike, where does the money go?
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theconversation.com
Super funds in Australia, Canada, the US, are now a massive component of capital investment both in the public market and in private equity. Australia's GDP is 2.5T and the super funds are up to 4T or 5T. Thats $trillion. The super funds are bigger than the GDP of the economy they reside in!
Some funds are just venal machines in the for profit sector. Some are run by boards aligned to union sectors, I am in the tertiary education union backed fund in Australia and it's been in the top 5 performing funds for my entire working lifetime, and given me a comfortable retirement. Most of the injection of funds was from me: I paid between 9 and 12% and on occasion up to 15% of my income into this fund over a 35 year working lifetime. Its accrual is all down to my fund manager, and if they invested in oil and have secured a windfall, at the cost of the future climate risk, thats on me, albiet indirectly. 35 years at the 150+ year 6-7% return in the market, (some say this trend is even older) is several doublings over my working lifetime. Those doublings were driven in .. the market.
Me here, is 75% or more of Australia. It's not some amorphous unknown nasty corporate investor in a sharp suit, its ordinary people. Oh, the article even points out that they pay out on insurance and capital costs rebuilding the exploded ships and production facilities. Guess who makes money? Thats right, the superannuation funds invested in the re-insurance market (Warren Buffett's favourite!) or in construction companies, public or private. So.. thats me again.
The money comes to us. Some of us may be in Saud. Sure. The Saudi state pays a huge stipend to its citizens. Some of us may be in Norway. That national investment fund is amazing. Why do you think Norway is now almost completely cut over to private EV drivers?
I'd love to ideate the hateful oil companies as the victors here but the thing is, they don't simply act like Smaug and sit on a pile of gold coins. Thats not held to be useful by them and their peers. They do shave off FAR TOO MUCH to swan about in those aforementioned sharp suits, but enough of the fat trickles into my hands, to keep me in the manner to which I am accustomed, as a retiree.
I'm as complicit, and so are "you" for many people reading this.
Depends on how you define "regular folk".
40% of American adults don't have any retirement savings account at all. And entirely unsurprisingly whether they do or not correlates extremely strongly with income/wealth.
So one could easily claim that the further from actual "regular folk" you are the more likely you are to benefit.
> 40% of American adults don't have any retirement savings account at all.
So, 60% have, 60% is more than half, so it takes the value of "regular folk". Ah, statistics.
Any definition of "regular folk" that excludes more than half the population is nonsense.
There is overlap, but there is also a large portion of regular people that do not hold stock in oil companies.
Nobody really gets rich by playing the market. You get rich by working hard and/or starting your own business, and investing in a diversified portfolio of index funds and dividend paying blue chips.
Exxon is up 40% year-to-date (YTD), BP is up 20% YTD while SNP500 is up 12% YTD.
So I'm not even sure the premise of this tangent is correct; oil stocks aren't shown to be the recipient of the current price spike.
But it's not sustainable in the medium term.
You think this is the only basis of investment in a large fund? You think they don't make plays which respect this fact, in their risk profile?
Come on now
'Tax the Rich' politicians will never give you a number when you ask just who they are talking about. It has to be fluid. Bernie Sanders used to rail on millionaires until he became one. Now he only says billionaires.
I'm also poor relative to the to 0.1% of people, but I still make a ridiculous amount of money compared to the minimum wage worker. If were better able to provide for everyone by taxing me more then I'd be all for it.
i agree. "capitalist" is the word for what people really mean when they talk about "the rich"
Let’s also assume you save every penny, you don’t buy a single thing, from food to shelter.
Let’s assume that inflation is zero, and you work for 50 years at this level from 20 to 70.
You will have earned $22.5 million.
Not bad. Remember this is without spending a single cent.
Now how do you think you get to a net worth of $220m? Or $2200 million? By working ten or one hundred times harder
You don’t get rich from working hard. You get rich by being rich and letting it snowball. $40k a year in an 8% return for 50 years gets you about the same.
Which is rich.
Don't get me wrong. I would love to have that kind of money. I would retire immediately if that was in my bank account.
But we're comparing to people who have 100x that. Or nowadays apparently literal trillionaires.
Like there's rich and then there's rich
Keep in mind that the situation that the OP suggested is a sort of spherical cow. Substantially more people earn <40k per year than earn 450k per year. It is extremely unlikely to earn that kind of money over that kind of timeframe, nevermind being able to save every single cent of it
Yeah, right
You are comparing the absolute value of something versus yearly performance.
Market cap vs revenue.
Market caps are roughly expected future earnings, discounted back to give some net present value. They're expectations about the profitability of businesses, with expected profits accumulated over forecasts decades into the future. Market caps ignore privately held businesses, small businesses, state owned businesses & economic activity, economic output that might be happening at a household level, etc.
GDP is some peculiar measure of a country's economic output, over one year. It doesn't care if the economic activity is profitable or not & it doesn't care if the surplus of the economic activity is extracted by public companies or not. It's not forward-looking & based on expectations.
all that said, ggm has a fair point that individual investors & retirees with share portfolios directly benefit from the profits of companies whose economic activities may not be particularly pro-social & beneficial to the world. it's similar for climate change -- easy to point the finger at the energy producer, the big dirty brown coal plant. harder to point the finger at the demand side of the same equation - much of which is household demand. but both the individual end consumer households and the energy producer & everyone else involved in the value chain benefit out of the trade, even if the trade is net-negative for the world if we were to properly account for the externalities (e.g. polluting the atmosphere with CO_2 pushes the costs to everyone on the planet, current & future generations, not just the folks benefiting from the trade).
If you add that most people have some common sense notion of what reasonable or achievable rates of returns look like, then what you said was just a bit vague and implicit, not necessarily a sin of dimension.
For a similar example:
An CPU designer might tell you that one clock cycle is 'this long' (where she stretches out her arms in front of her). She's not committing a sin of dimension, more likely she's talking about how far electronic signals travel during one clock cycle.
https://www.unisuper.com.au/investments/our-investment-optio...
It's diversified, but the biggest holdings tend to be in Australian Banks, BHP and the "big" US tech stocks.
US has $40T federal debt (+state, +municipal, +household) and probably 100T+ debt worldwide which the future generations have to pay.
Fossil fuel is unsustainable without substantial subsidies from Govts. Global Fossil Fuel Subsidies Reached $7 Trillion in 2022, an All-Time High: https://e360.yale.edu/digest/fossil-fuel-subsidies-2022
More than a century of subsidies and yet not profitable on its own.
Future US citizens are clearly not going to repay the debt, simply because they can't feasibly pay that much back in real terms. They cannot achieve the impossible. The magnitude of the debt is far beyond what it makes sense for the US to make good on.
Future generations of the US won't be able to borrow on such favourable terms (ie, people will stop donating to the US cause) and all the capital investment that would have happened in the US to power their consumption happened in China instead - but the effects of the debt won't look like repaying anything.
The Us population can afford to repay the money it owes.
A few public servants in Australia? I'm not sure what you mean?
Superannuation may have been limited to a public servants and employees of large corporations in the 1970s, but was expanded to blue collar workers in the 1980s (see industry super funds), and mandatory for all employers in the 1990s. Almost every worker in Australia has a superannuation fund. Whether a given person's fund is invested in fossil fuels is another questio (mine has a radio button to choose green only investments or not).
That 'nasty' guy usually serves investors, instead of investing his own money. For all he cares, these investors might be widows and orphans.
Btw, Singapore's sovereign wealth funds are also big players in basically the same space. Their revenue contribution to the national budget is bigger than any single tax we levy.
Let’s forget about the people who did set up the system, and do control and understand it.
Very reasonable. Very logical and sensible.
That's because a pile of gold coins does not make money. One makes money by investing the coins, not investing in coins.
I always thought Smaug's hoard (as depicted in Jackson's movie) was beyond ridiculous. If it was unleashed on the economy, the price of gold would drop to the point you could pave the roads with it and make sewer pipes out of it.
Maybe gold was already cheap. Maybe a gold coin was as silver to you and I.
I think I'll have Claude do a deep dive and research into this report, then release a paper on it.
(This goes under the theory of 'the more capacity you have, the more capacity is used' concept, and so, within a few years, we'll have 100 page reports on musings like this, instead of a two or three line post)
But rather than advocating, or even agitating, for a change in the system that perpetuates unacceptable -- and now unavoidable -- climate risk, you seem pretty sanguine about the whole thing.
With bespoke human-crafted em-dashes, not slop-dashes.
Capital, including shares in companies, is greatly concentratred in a few people - the highest concentration in ~ a century. The money is going to those people. You might say they are benefitting from the war.
A great many other people don't own shares or retirement accounts. Studies show that ~50% of Americans can't cover ~$500 for an emergency (yes, liquid cash is different than a retirement account, but you can borrow or withdraw from it in an emergency).
Do you prefer it benefit everyone uniformly?
Everyone gets the exact same $ dividend whether $100 invested or $100k invested?
In Canada, the comparable funds are: Canada Pension Plan (CPP, mandatory contribution for all employees), employer-managed pensions (not all companies have one; policies vary such as defined benefit vs. defined contribution), personal RRSP (you make the contribution and you select the investments).
I guess the comparable funds in the USA are: Social Security (mandatory contribution for all employees), employer-managed pensions (not all companies have one; policies vary such as DB vs. DC), personal IRA such as traditional/Roth.
If anything prices are being kept artificially _low_ by the US withdrawing from the strategic petroleum reserve, and similar (unquantified) actions being taken by the Chinese government. We'll have to see how the situation changes after the US midterms.
OP's comment was that we are at 0 and nothing left. I pointed out that they were being hyperbolic or that they don't understand the strategic reserve (or both).
I doesn't matter where the operational band is - if at about 280 M barrels - they have a reasonable amount of runway before they start hitting hard technical barriers per OP comment especially with oil flowing into the country from other sources.
Oh, right.
... but it (and TFA) still can't explain to me a 100$/barrel premium captured by diesel refineries recently !
This allows the government to hide taxes in the total cost and blame the oil companies for it.
Is there any indication the gas tax is being blamed on oil companies? It’s literally a fixed cost per gallon… so all the extra cost literally is from oil companies. There’s even some places trying to suspend or cut the gas tax temporarily to artificially suppress the cost at the pump.
The gas station operators sometimes do put stickers like "this is how much tax is in the gas price you pay" on the actual pumps as if to blame the government for the greed of the large refineries. But here, after the strait of Hormuz debacle, we've actually had the government lower the gas tax for a while so that people who need their cars for work arent stuck with the higher bill so much. And what do you know, somehow the gas got a little cheaper, but not nearly by the amount of lowered tax. Guess who pocketed the difference.
Worse still, the government then enacted a rule that the gas price could only be raised once a day, but lowered any time. And in average, gas was even more expensive than before.
So yeah, I have trouble blaming the taxes for the high gas price.
We have excise, stockpile levy and vat coming up to 47% of the almost 2.8 eur pump price
Same for the supply lines, just the other way around.
Also, the use of straight lines indicates a linear relationship. Is that really the case in practice?
I find it also hard to read it that way when I look at that "Price in February -> Price in April" annotation: if those two points on the y-axis mark points in time, then so do the correlating points on the x-axis. I can only read that as "from February to April, the demand went up while the prices went down".
Since the graph is without units, the only relevant of their positions are the signs of the slopes, and that you need a higher price to supply oil at any given quantity (hence the Straight closed" line being higher on the graph).
I agree with you that price should be on the X axis, and drawing the two supply lines in the same diagram is at least somewhat problematic.
What economists posit[0] is that at any point in time, there are demand and supply curves. They answer the question of who is willing to sell or buy how much given a price? (Quantity is the dependent, so should be the Y axis!)
And they argue that the microarchitecture of the particular market causes price and quantity to converge to where these lines intersect.
And then factors external to the market can change the supply/demand curves. The February diagram looks different from the April diagram. They are conceptually separate diagrams. Combining them into a single diagram in a coherent way would lead to something 3D, which is hard to draw and think about, so economists have the convention of drawing it all in a single diagram anyway.
None of this is correct, by the way, but it's sometimes a useful model.
[0] Outside of literal markets with order books, supply and demand curves don't really exist. And in those markets, their dynamics are different.
why? no idea
If demand were to be greater, the entire demand line shifts to the right. But demand is generally stable because oil is a neccessity in the short term. This demand line is near vertical which means people/companies will buy a little less when the price spikes, but not drasticly less. People still need to drive to work, heat homes, etc.
You were long oil if you are an oil producer, or, e.g., if you owned oil futures. You were short oil if you are an oil consumer, or, e.g., if you had sold oil futures. If you are both (e.g., airlines might hedge future oil consumption by buying futures, and producers might hedge future production by selling away their future production), then you need to net it out across the futures curve.
Price responses to supply shocks in theory serve to allocate resources appropriately (e.g., if your consumption did not matter that much, you might curtail it); if another person's consumption is more productive (i.e. profitable), then they're likely to eat the input cost and still buy it. In the long run, you might hope that high prices lead to more investment in producing the scarce good, or in more hedging activity to prevent future harms. The net effect of (long) hedging activity is generally to slightly increase the future price because folks buy futures / futures options, and market makers, in addition to selling the option, buy the underlying to remain market neutral. This potentially increases future supply because it can, in theory, push up the futures price, or estimates of future price, which can make new resource extraction economical.
Unfortunately, today, given the degree of inequality, it is mostly poor people whose consumption is curtailed when there are supply shocks. This is consistent with the above interpretation: the implication of wealth inequality is that the poor people matter less and are less productive to the capitalist machine. As a real example of this, the oil price would likely be higher even, if the oil consumption of Southeast Asian countries had not decreased because they could not afford the higher prices. This is the great thing about inflation in a highly unequal society: it is partially tempered because demand goes away as prices rise.
Inflation is the result of devaluing the currency by creating money (i.e. deficit spending).
Oil prices do not cause inflation. Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere.
I strongly suspect this definition strongly correlates with what most people call inflation (my fuel bill went up! and strangely, not heading to work wasn't really an option).
If printing value-free money wasn't how we are ruled, we could even come up with a diversified scheme where an alchemist could discover a way of turning silicon into gold and it wouldn’t affect the economy much.
People seem to have very odd views on inflation. “Eggs have doubled in price therefore real inflation is 100%”
The basket of goods and different figures are all there, build your own basket if you want and come out with your own inflation level. Don’t just gut feeling it.
Now there are legitimate issues — if the cost of 1kg of pasta hasn’t changed, but it is no longer available int he shops near you, then that’s a problem.
Nope. Because if you spend more on one commodity, you necessarily spend less on other items. Spending less means less demand, and corresponding price reductions.
This is the Law of Supply and Demand at work.
Which also explains inflation - more money dumped into the economy, without a corresponding increase in the goods & services in the economy, devalues the money (see Law of Supply and Demand), which we call "inflation".
Money is not "special", and is subject to the LoSaD just like everything else.
Look what happened to Beanie Babies' prices when Tyco flooded the market with them. What do you think would happen to the price of Ferraris if Ferrari quadrupled production?
Why do you think Argentina's inflation is way down? It's the reduction in deficit spending. Do you think the Weimar Republic's trillion-to-one was caused by oil prices?
Though I agree that printing new money causes inflation (not all economists agree!), inflation does not have to be the result of new money creation. Shifts in behavior can lead to short term changes in price levels. All inflation is measured relative to a basket of goods. If prefs change for diff goods, then price levels (and thus inflation) can change.
> Oil prices do not cause inflation. This is probably not true in the short term. If the input costs for everything go up, then price levels change, and the CPI basket likely changes (up).
If we more reasonably measured inflation as some notion of quality of life, then increases in energy prices (which factor into everything) would definitely reduce per capita material well-being.
> Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere. My point is that if you have a collection of people who can just barely afford something, and the price of that thing goes up just a little, those people will not be able to buy it. A person who gets priced out of participating in society (and, e.g., dies) contributes nothing to inflation. On the other hand, folks who have some capacity to adjust their consumption or who have a savings /capital buffer, may be able to reallocate funds to the purchase of oil (or other goods whose prices are increasing). This can lead to a further rise in the price of goods (hence, inflation).
Printing doesn’t cause inflation, releasing it into the economy does. Giving it all to one person in a Brewster millions challenge is unlikely to, as they aren’t going to be able to spend much.
> Increases in the price of X cause the demand for X to drop
There has been a lot of "demand destruction", but because oil is an intermediate input to so many things, especially anything that requires transporting, what actually happens is it forces up the overall price level.
It's simply following the facts and the history of inflation in economies.
If oil forces up prices, that means people have less money to spend on other things, which reduces demand for them, which reduces prices.
The only way to get a general price increase is to increase the money supply.
Inflation numbers track the deficits, with a lag of about 13 months.
And when was the last time oil price reductions caused deflation?
Deficit spending isn't the only way to increase the money supply. Lowering interest rates and increasing loans is another.
People go into debt to pay for expenses and necessities.
In fact here's a simplified model: oil prices increase, oil stocks go up, shareholders borrow against them and pay for gasoline. No government deficits were created but the money supply increased due to oil prices going up.
The federal deficit, however, is not being paid back, and so the increase in the money supply causes inflation.
Elasticity of goods has entered the chat. If a significant amount of inelastic goods' price increase, cue inflation. Energy costs, especially fuel, are classic drivers of inflating prices.
That's what politicians want you to believe ("Putin's price hike"), to divert attention from the real cause, massive deficits, which are the fault of the politicians.
BTW, Rockefeller dropped the price of kerosene by 70%. Why was there no deflation?
> Commodity prices going up definitely causes inflation.
Nope. The proof is when they come down, there is no deflation.
Like, there's a trade you can do where you load up an actual tanker with oil, park it, and sell an option to buy that oil. The cost of using this tanker and holding this oil a pure waste compared to just having a market-clearing quantity available at a consistent price at all times, but if the market is scared enough it makes money.
Doesn't reduced overall supply usually mean that the total amount of money (price * supply) also reduces? ie. in total, there is no additional money.
Shelley Duvall was amazing in Popeye.
Edit: yup
I mean, i guess, but i suspect Saudi Arabia would rather not be dragged into this war (incl. the proxy part with yemen). I doubt the higher oil profit compensates for the other consequences.
Oil companies are interesting because it seems like the first thing that happens if there is any kind of problem is put their prices up?
Do farmers triple or 5x the price of food during droughts?
Yes, actually. The price of 1 pint of real vanilla extract is currently $9.59 at Costco. I have seen it as high as $42.99. That is a nearly 5x spread, and it largely depends on the weather and politics in Madagascar.
I always though that it basically was conditions reduced supply (weather and politics), purchasers of the raw products basically get all of the available production at pretty close to standard prices for what limited amount there is, farmers who dont have product get no income, farmers with product get some - maybe a little more per unit but fewer units overall, and then the raise global prices was due to the tier 1 buyers/distributors needing to cover fixed processing and distribution premiums which do not fluctuate much even when supplies are low.
So, Madagascar by virtue of overwhelming percentage of production pretty much set the availability curve, but i expect farmers pretty much get what they get for the beans they grow, within a range and that's probably not more than 2x at most. But I could be way off and the 5x price differential is perfectly proportional, 5x cost of raw bean == 5x cost of delivered extract.
Wages are "sticky" and negotiated directly between two parties. Oil is a globally traded commodity. Oil companies don't just decide to "put their prices up", though large players can influence it.
When a shock happens, buyers immediately bid up the price to secure limited future supply. Producers largely aren't involved in that pricing.
I will also add that, depending on the situation, your company having hard times very well might be the time to renegotiate your pay. It also though may be the right time to sit quietly and not draw attention to yourself.
Crude oil is essentially worthless. What makes it valuable is a refinery that turns it into any number of products, most notably the middle distillates such as gasoline, diesel and aviation fuel ("avgas", which is just kerosene basically). Oh and heating oil.
How refineries work is they buy crude oil on the open market and produce a mix of products. A refinery will be somewhat designed for a particular flavor of oil but they'll also mix these oils to produce a more profitable product mix. The only big issue here is if oil is sour or not, meaning it's high in sulfur. You need processes to extract the sulfur. Most US crude is sweet (meaning low sulfur).
The general mix that gets tracked to see how healthy the refining industry is is the 3-2-1 crack spread [1], meaning 3 barrels of oil to produce 2 barrels of gasoline and 1 of diesel (and heating oil). Since the start of this war of choice in Iran the crack spread has gone through the roof. Why? Because a certain portion of refining capacity is inaccessible (being in the Gulf) and a bunch of it has been damaged, particularly in Russia.
So oil prices aren't higher because there's simply a lack of refining capacity to produce useful goods. Saying oil is "only" $100-110 misses the real issue entirely. If the refineries were still online, the oil price would be much higher so, as a result, the middle distillates would still be near record highs.
I see some comments here writing off OPEC (and OPEC+). That's a mistake. If you want to see an example of how OPEC can still screw us, look no further than the pandemic inflation shock, which was almost entirely caused by the Trump 2020 OPEC deal, which cut global oil production by 10% (going down to 6% over 2 years).
In 1945, FDR made a deal with King Faisal of Saudi Arabia, which was basically oil for weapons. The Middle East keeps oil flowing and the US guarantees their security. That's why the strategic defeat of the US in the Gulf is so consequential because it's an end to the US security guarantees that have lasted over 80 years.
Oil exists to induce demand for weapons the US sells.
Am I the only one who finds this disingenuous? It's like saying: "the police's arrival to the bank robbery took someone hostage." The police's arrival may have triggered the hostage taker's actions but it was still their actions. It's like the author let their dislike of Trump get in the way of accuracy.
It's easy enough to argue that the war is a disaster without being misleading about who did what.
If you want, we can change the moral insinuations. "The bully hit himself in the face." No, the poor kid being teased hit the bully in the face.
And in fact, rhetorical tools like that make it easier for people who disagree with the authors stance to discard the author's argument on the whole. "This person either doesn't understand the situation well enough, or is willingly lying to me. Why would I listen to them."
In your example, the bank robbers started the situation.
Who started the war again? Was it Iran that started bombing the US unprovoked, or the US that started bombing Iran unprovoked?
Trump said he started the war because Iran was about to nuke the United States, despite months before saying their nuclear programs were totally obliterated, and his own DNI stating there was no evidence Iran had actually restarted their nuclear programs. Once again, who is the but-for cause of our current state of affairs?
It is absolutely not misleading to point the blame of the current state of affairs at Trump. We wouldn't be in this mess if it wasn't for his extreme incompetence. We didn't have to start this war, its his war of choice. If you stick your hand in a blender and turn it on you don't blame the blender for your mangled hand. The Straight being closed was an obvious out come of his actions, he was made aware of it, and he started the war anyway despite the US not needing to be involved. He himself campaigned on not getting involved in scenarios exactly like this.
> the U.S. and Israeli attacks on Iran closed the Strait of Hormuz
Trump's choices and actions directly led to the situation we're in, right? As in, if he didn't choose to start an ill-planned war based off lies, we wouldn't be here, correct? Is there any part of the above that's actually incorrect or untrue? Iran wouldn't have just closed the Strait for giggles would they? So why is the Straight closed again? Because Trump is a gullible moron or is deeply compromised by Israel. Or potentially both!
> Iran has agency
Trump has had agency as well throughout this whole thing, and continues to be involved in an illegal war he chose to start on the other side of the planet. The US doesn't need to continue to be involved, it didn't need to start the war in the first place.
If the goal is truly to look at this without moral bias and just examine the causal chain of events, those analogies don't work. There is no geopolitical equivalent of your examples without bias. It's two competing states engaged in an escalating conflict. When you use analogies that bake in a "good guy/bad guy" dynamic, it introduces the exact moral framing you stated you were trying to avoid.
In your analogy, the crims performed the burglary. That lead to the police arriving. That lead to the police closing the street. You can argue that the crims "didn't close the street", and sure, they didn't. But the street is closed purely as a result of their actions.