Why are oil companies buying back so much of their own stock? The reason is that they don’t have a lot of truly attractive opportunities for investing in new production. Most of the oil reserves are either legally off limits for the them or they’re de facto off limits because they’re in places where it’s so hard to do business.
Although all of us are seized by the high price of energy, the major energy companies are concerned that prices are going to decline sharply. If there is a recession, which would dampen demand for energy, or the capacity to produce oil around the world improves, then prices will decline. That fear retards a lot of investment because these investments have a very long capital lifetime, and need to be protected against low prices over an incredibly long time horizon.
So high oil prices are good for us because they incentivize oil companies to invest in more efficiency?
Wrong! In reality, much of the revenue from high oil prices is accruing to state producers like Russia, Iran and Saudi Arabia. Indeed, the Soviet Union’s most dangerous adventures correlated with the high oil prices in the 1970s. And when oil prices came down, the Soviet Union collapsed. Geopolitical tensions can only increase as undemocratic producers become increasingly wealthy and dictate terms to the US, India and China.
High oil prices do have some positive effects though-photovoltaic startups are springing up all over the world. Toyota, Honda and the Detroit 3 continue to innovate on electric vehicles. Ethanol production from corn in the US and from sugarcane in Brazil is rapidly rising.
Although all of us are seized by the high price of energy, the major energy companies are concerned that prices are going to decline sharply. If there is a recession, which would dampen demand for energy, or the capacity to produce oil around the world improves, then prices will decline. That fear retards a lot of investment because these investments have a very long capital lifetime, and need to be protected against low prices over an incredibly long time horizon.
So high oil prices are good for us because they incentivize oil companies to invest in more efficiency?
Wrong! In reality, much of the revenue from high oil prices is accruing to state producers like Russia, Iran and Saudi Arabia. Indeed, the Soviet Union’s most dangerous adventures correlated with the high oil prices in the 1970s. And when oil prices came down, the Soviet Union collapsed. Geopolitical tensions can only increase as undemocratic producers become increasingly wealthy and dictate terms to the US, India and China.
High oil prices do have some positive effects though-photovoltaic startups are springing up all over the world. Toyota, Honda and the Detroit 3 continue to innovate on electric vehicles. Ethanol production from corn in the US and from sugarcane in Brazil is rapidly rising.
5 comments:
wow, your knowledge of the inner workings of the OnG industry is truly astounding.... so STOP BUGGING poor souls who work i-bankin hours at these oil companies and have just a bag of peanuts to show for at the end of the month!!!
Oye OnG, dont get irritated la. Btw, real I-banking hrs are 16 hrs per day.
None of us does that...so dont crib!
-N
All the I bankers I meet are fitness fanatics and look like they spend plenty of time in the sun. So unless I banks have started offering sun-tan lotion in their offices, I doubt that they work the so-called "I banking hours".
I think bnakers like to create this myth in order to justify their highly bloated salaries and egos.
-P
Just the facts!
With so much volatility in today's world oil market, many are seeking out alternative fuels to power cars. Some, including corn producers, have touted ethanol is a possible alternative fuel. Ethanol, or ethyl alcohol, is made by fermenting and distilling simple sugars from corn. Ethanol is sometimes blended with gasoline to produce gasohol. Ethanol-blended fuels account for 12 percent of all automotive fuels sold in the United States, according to the Renewable Fuels Association. In very pure forms, ethanol can be used as an alternative to gasoline in vehicles modified for its use.
In order to calculate how much corn you would have to grow to produce enough ethanol to fuel a trip across the country, there are a couple of basic factors we have to consider:
* Let's assume that you drive a Toyota Camry, the best-selling car in America in 2000. We know that the Toyota Camry with automatic transmission gets 30 miles per gallon of gas on the highway.
* Gasoline is more efficient than ethanol. One gallon of gasoline is equal to 1.5 gallons of ethanol. This means that same Camry would only get about 20 miles to the gallon if it were running on ethanol.
* We also need to know how far you are traveling: Let's say from Los Angeles to New York, which is 2,774 miles (4,464.2 km), according to MapQuest.com.
* Through research performed at Cornell University, we know that 1 acre of land can yield about 7,110 pounds (3,225 kg) of corn, which can be processed into 328 gallons (1240.61 liters) of ethanol. That is about 26.1 pounds (11.84 kg) of corn per gallon.
First, we need to figure out how much fuel we will need:
2,774 miles / 20 miles per gallon = 138.7 gallons
(METRIC: 4,464.2 km / 8.5 km per liter = 525.2 liters)
We know that it takes 26.1 pounds of corn to make 1 gallon of ethanol, so we can now calculate how many pounds of corn we need to fuel the Camry on its trip:
138.7 gallons * 26.1 pounds = 3,620.07 total pounds of corn
(METRIC: 525.2 liters * 3.13 kg = 1,642 kg)
You will need to plant a little more than a half an acre of corn to produce enough ethanol to fuel your trip.
If you think you would save any money by using ethanol, guess again. Ethanol is expensive to process. According to the research from Cornell, you need about 140 gallons (530 liters) of fossil fuel to plant, grow and harvest an acre of corn. So, even before the corn is converted to ethanol, you're spending about $1.05 per gallon.
"The energy economics get worse at the processing plants, where the grain is crushed and fermented," reads the Cornell report. The corn has to be processed with various enzymes; yeast is added to the mixture to ferment it and make alcohol; the alcohol is then distilled to fuel-grade ethanol that is 85- to 95-percent pure. To produce ethanol that can be used as fuel, it also has to be denatured with a small amount of gasoline.
The final cost of the fuel-grade ethanol is about $1.74 per gallon. (Of course, a lot of variables go into that number.) The average price for a gallon of gas in the United States is about $1.40 as of August 9, 2001, according to GasPriceWatch.com.
Good analysis. However, the Ethanol shift is driven by three factors in the US.
1. Reducing dependency on unstable foreign sources of Oil. The US was badly burnt by the oil price shock in the mid-70s and most people are suspicious of energy dependency
2. Ensuring good prices for the corn farmers
3. The democrats are back in power and they have traditionally pushed for alterate sources of energy
The price comparison example is not valid when you make a switch for strategic reasons.
In any case, the US government can simply increase subsidies and push the price down per gallon so that it becomes more than competitive with gasoline.
-R
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