Chinese Economics Thread
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Equation
Lieutenant General
Inflation is starting to get on my nerves here in the US. If the conflict in Libya supposedly cause a shortage in supply in petrol demand in Europe, therefore a decrease in price of gas. Why am I still paying F*#$% $3.60 a gallon? This been going on for months now.
Schumacher
Senior Member
What are you complaining about ? In the US, your ruler says inflation is under control.
The core CPI without 'unimportant' items like food and energy but includes items like ipads and your wages are indeed falling.
So quit whining and go eat your ipads.
bladerunner
Banned Idiot
The oil companies can charge what they like, because you are a captive consumer with sweet F.A. other choices.
petty officer1
Junior Member
I am very sorry to hear the price of oil is effecting you (and everyone else too). But to your dismay, the price movements of oil are not exactly due to the movement of the supply and demand. For example, the demand of oil in the US and EU have been fairly steady since 2008, but why have the price moved up +35% to the current $112 a barrel? Classic economic models simply can not explain the complexity of modern era oil price movement. Mainly because they ignore the middle transactions, modern oil trades are like...
1. Most oil companies don't buy tankers after tankers of oil, they buy oil futures that are contracts, promising a price in a future term; regardless of the price that time. (unless the oil companies drill the oil themselves, that is another story.) This way it cut down on risks, and set a know price regardless of future price.
2. looking at #1, Since oil futures are sold on open financial markets (most of these contracts were underwritten by big financial institutions.) The difference in price of the futures and current price gave the public a chance to speculate on the price of oil since there are always an spread between the future contract price and the "real" price. This trade is called
"oil arbitrage trading."
Ex. A XYZ investment bank's commodity trading desk saw the Libya conflict will shot the price of oil up in the future, due to market fear. So the trader using his firm's own cash of 100 million dollars, leverage that with 250 million more borrowed from another financial institution. (His position is now 1:2.5) Totaling 350 million dollars now, the trader buy 6 super tankers worth of oil contracts, giving him the right to buy them at $100 a barrel in 1 month. (since his massive trade, the price of oil future goes up, oil companies now have to spend more on buying oil contracts.) In one month the price are now $105 a barrel. The trader now sale all his $100 contract at $103 to oil companies (oil companies want those contracts, since $103 is a lot cheaper than the current $105 per barrel.)
Here is where the magic happen
The trader made 3% of 350 million dollars, that is $10,500,000 (he/she will also has to return the 250 million dollars to his lender with interest off course) in one month with a click of the mouse on his Bloomberg terminal. And his managing director will be very happy, since both of them will get bonuses on that trade at end of the year.
This cost get passed down to oil companies, then to people like us (consumers).
That single transaction was done on a DAILY basis by investment banks, mutual funds (believe it or not), hedge funds, private equities (believe it or not), Fixed-income traders, and airline companies (believe it or not, Southwest airline have their own oil future trading desk)...
All those intermediate trades all affect the price of oil, not simply the supply and demand. If supply and demand are the case, price of oil should be very linear, and we know that is not the case.
And it gets more complicated with something called, oil ETF (exchange traded fund)... that affect the price greatly too...
I hope that help answering why they are getting more expensive.
P.S. don't worry, US will not have any serious inflation like the current vietnam one
any time soon.
Petty officer1
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bladerunner
Banned Idiot
Why does petrol go up at the gas station because there has been a sudden upward movement in oil prices a few days earlier but can take weeks even months adjusting downwards when the the price of oil tracks the other way?
petty officer1
Junior Member
Because unlike stocks, which can be diluted (massive sale orders making it go down) quickly. Most oil companies hold on to their already brought oil in their inventory. Most oil company don't really sale their already brought oil. If they sale any contracts, they have to make a profit on it. So it is very hard for oil to drop suddenly in regular time. While there are always a pressure for it to go higher to profit institutions and oil companies' stockholders.
But that that is not always the case.
Remember the quick drop of oil prices in the 2008? that is due to major institutions are dumping their oil contracts to pay for their margin calls and other investments' interest payments that are going sour.
But that that is not always the case.
Remember the quick drop of oil prices in the 2008? that is due to major institutions are dumping their oil contracts to pay for their margin calls and other investments' interest payments that are going sour.
bladerunner
Banned Idiot
And a company like B.P. which has its own oilfields and retail outlets, operates under the same rules?
RedMercury
Junior Member
And thus the rich rob the poor, legally. Hurray.
On a side note, since the "hedging" users of the futures market for oil buy and hold, would it make sense to impose a tax on transactions, to discourage outside speculators?
On a side note, since the "hedging" users of the futures market for oil buy and hold, would it make sense to impose a tax on transactions, to discourage outside speculators?
Just an intermezzo inspired by the agreement between China and the UK to set up RMB trading in London.
The valuta reserves of most British former colonies consisted until the late '50's for a large part of Sterling. ( Then was the Suez crisis of 1956 and Sterling lost its role of reserve currency ). At the time there was no freedom to transfer capital out of the UK without consent of the Bank of England ( or was it the Treasury? ). This is nicely illustrated in the last novel by Nevil Shute, "Trustee from the tool room" ( 1960 ), where the brother-in-law of the main character wants to emigrate to Canada. To take his capital with him, a quarter of a million Pound Sterling, many millions in current Pounds, he buys nearly a hundred diamonds and secretes them in the yacht he and his wife use for their journey.
China is now freeing its capital flows and is now about as far as the UK was in the middle '60's.
Btw the trade in US dollars between non-US banks, long called Euro-dollar market, but now so common its has lost its name, was initiated in the '50's in London by a Soviet bank, the same bank that lent money to Doris Lessing to enable her to write her first book. That dollar trade was an innovation. China now allows its extension to RMB.
The valuta reserves of most British former colonies consisted until the late '50's for a large part of Sterling. ( Then was the Suez crisis of 1956 and Sterling lost its role of reserve currency ). At the time there was no freedom to transfer capital out of the UK without consent of the Bank of England ( or was it the Treasury? ). This is nicely illustrated in the last novel by Nevil Shute, "Trustee from the tool room" ( 1960 ), where the brother-in-law of the main character wants to emigrate to Canada. To take his capital with him, a quarter of a million Pound Sterling, many millions in current Pounds, he buys nearly a hundred diamonds and secretes them in the yacht he and his wife use for their journey.
China is now freeing its capital flows and is now about as far as the UK was in the middle '60's.
Btw the trade in US dollars between non-US banks, long called Euro-dollar market, but now so common its has lost its name, was initiated in the '50's in London by a Soviet bank, the same bank that lent money to Doris Lessing to enable her to write her first book. That dollar trade was an innovation. China now allows its extension to RMB.
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