silly economy question

[itsasmallworld1]

Hola all

does anyone know how the price of comodities is established?
I mean, we all know there are political reasons behind it, as lowering the oil price in order to make Middle East economies go down.
But how is it done? who is the price creator?
Same with gold and other stuff.

thanks

[Voy]

actually the drop in oil is partially due to bloody "fracking" as there is now a LOT more fuel around. OPEC was pretty good at raising prices, but not so hot in a dropping market. commodities are actually closely tied to the real thing - with a veneer of politics over. ( Except for things like coffee,, where only a few players really do control the market - except for mother nature

[auntieannie]

is there really lots more fuel around with fracking? because I understand it uses a lot of energy to get to the black stuff when you frack for it. and are the associated risks worth it?

Itsa, maybe find books on macroeconomics, etc?

my understanding is that demand and offer or whichever way you call that is one part of how the price is set, together with macropolitics and yes, the climate.

[slowcoach]

There is a lot going on that is affecting the price for oil and gas just now but ultimately it is a price set by the market but skewed by some factors like the operation of the OPEC cartel which right now is acting to force the price lower which is impacting investment in new production and may make some fields and unconventional production methods uneconomic which may be their point.

If you want to know how the market sets a price perhaps TFC will pass by and comment.

[Scrubb]

Dec 26, 2014 18:04:25 GMT 2 auntieannie said:

is there really lots more fuel around with fracking? because I understand it uses a lot of energy to get to the black stuff when you frack for it. and are the associated risks worth it?

Those are 2 completely different questions. The answer to the first is: yes, there are MANY deposits being exploited in the USA, anyway, with fracking. It's been a game changer over the past couple years.

The second question won't be answered for a loooong time, until we see what kind of damage occurs and how long the reserves last.

[itsasmallworld1]

So to see if I got it:

OPEC is lowering the price in order to make fracking less appealing?
I thought it had to do with US and not giving so much power to Venezuela and Middle East economies... (am I too wrong to think this?)

WHO/WHAT is TFC?

[auntieannie]

I think TFC is tilted flipped curved.

[Scrubb]

Dec 26, 2014 20:07:45 GMT 2 itsasmallworld1 said:

So to see if I got it:

OPEC is lowering the price in order to make fracking less appealing?
I thought it had to do with US and not giving so much power to Venezuela and Middle East economies... (am I too wrong to think this?)

That's my understanding. Fracking costs more than other forms of oil extraction; OPEC is lowering the price so that it's not economical. There may well be other reasons too for OPEC's action that I don't know about.

The USA wants very much to be energy independent, or at least not to rely on imports from countries they aren't friends with, and I'm sure that there is some subsidizing of fracking operations to make that happen. So I don't know how much effect OPEC's pricing will have on the industry but if prices stay low for long enough, it will make a difference.

[itsasmallworld1]

Do prices go up in your country whenever petrol goes up? (gas)
Everytime gas/petrol goes up here ( I have not lived long enough to see it ever go down yet) everything from bread to plane tkts goes up

[kuskiwi]

Petrol prices have just gone down here - and we are still looking for the pigs that fly that should accompany that startling news. The importing cartel have had their collective fingers smacked by the govt at not passing on some of the huge profits they are making. Want to make money here - invest in petrol distribution shares.

Fracking is also creating issues here as my local area is an oil and gas producing one.

[auntieannie]

yeah, petrol prices has also just gone down here. and we're also looking for the flying pigs. Yes, itsa, because in this day and age so many things have to be transported around, the price of petrol impacts the price of everything else.

[Scrubb]

OUr petrol is about 30% cheaper than it was 6 weeks ago, and the cheapest it's been in over 5 years.

[tiltedflipcurves]

>If you want to know how the market sets a price perhaps TFC will pass by and comment.

I'm touched by your faith in me -- but yes, I do practice in a sector of law where a working knowledge of econ 101 comes in handy.

In a competitive sector of a market economy, prices are "set" where the supply and demand curves cross, meaning the point at which the cost of producing (broadly defined, including transport marketing etc.) one more unit for sale is just barely what the next unsupplied customer is willing to pay.

Fracking has lowered the cost of producing gas and oil, so more can be supplied at prices that more consumers are willing to pay more often. And geopolitics is interfering with OPEC's ability to keep production limited below that point (which limitation yields lower sales and revenues but higher profits).

I don't believe there's any explicit subsidization of fracking any more (though some of the initial research involved academic funding perhaps). There are failures to internalize externalities (i.e. allowing pollution) which can be considered a subsidy.

Slowed demand growth is probably the most important factor: Europe still has its head up its austerity, China's one child policy is reducing population growth, and Obama's auto fleet efficiency standard is working.

[Scrubb]

tfc - in the way you've explained it, fracking is responsible for the drop in cost of oil - but in all the media reporting, they're saying that it's OPEC that is depressing the cost of oil, intentionally.

Or is it that fracking lowered the price some, but now OPEC is depressing the price even more to try to make fracking uneconomical?

[tiltedflipcurves]

You're looking for one factor when there are several, and intention behind outcomes of multiple independent actors. Here's a good summary:

fivethirtyeight.com/datalab/the-law-of-supply-and-demand-suddenly-applies-to-oil-too/

[Scrubb]

Thanks for the link, tfc. It helped clarify OPEC's role in the situation.

I am wondering about your comment that "Fracking has lowered the cost of producing gas and oil". My understanding is that fracking has increased supply, with the resulting "glut" affecting the price (as a glut will do). But has it actually lowered the cost of production?

[tiltedflipcurves]

Has it actually lowered the cost? I have to answer with a question: Compared to what? Compared to extracting the same quantity of fuels under current conditions but without that technology, decidedly yes. Lowered it to the point that the average extraction cost is now lower than some past date when there was more oil in the ground extractable by conventional means? No.

[itsasmallworld1]

Who are OPEC? I mean, how does one get elected to be a member of OPEC?
Is it representatives of countries or tycoons or what?
Can I be a member of OPEC?

[tiltedflipcurves]

You can be a member if you're a petrol-exporting country and the 12 existing country members want to let you join. But it's a tres sheik group.

[itsasmallworld1]

Oh... I see.. another club which does not want me.
Bah humbag!

[vinnyd]

Venezuela is a member of OPEC.

[masha]

I'm a bit late to this discussion.

Prices generally, including for commodities, in market economies are determined by the forces of supply and demand. The price of a good or product is set at 'what the market will bear' i.e. as high as what the market is prepared to pay for it. If no one wants a good or product (low demand), the cost would be low. Scarcity increases prices. There are exceptions.

High demand and low supply = high price e.g. diamonds, gold
Low demand and high supply = lower price e.g. current oil situation

Demand for oil has reduced and so has the price. It's a bit of a vicious circle for the oil producers because to achieve the revenues they were achieving previously, at these lower prices they need to keep producing the same or larger quantities. This further pushes the prices down because supply is higher than demand. If the oil prices continue to fall then commodity extraction will cease to be a viable activity for some producers.

It's a worrying situation for Australia with an economy so reliant on commodities.

[missalaska]

Dec 26, 2014 23:01:02 GMT 2 itsasmallworld1 said:

Do prices go up in your country whenever petrol goes up? (gas)
Everytime gas/petrol goes up here ( I have not lived long enough to see it ever go down yet) everything from bread to plane tkts goes up

Yes in South Africa is does.

The main fuel prices - diesel, petrol and paraffin (many people use paraffin in this country for cooking and lighting) - are government controlled. They are slightly cheaper on the coast than in land, but on a monthly basis they are adjusted and even though our currency is very weak at the moment, we are getting at R1.27 decrease on Wednesday that is nearly 10% as I think it is about R12.80 at the moment. But I can guarantee that food etc won't go down.

[itsasmallworld1]

Jan 4, 2015 20:24:20 GMT 2 missalaska said:

Dec 26, 2014 23:01:02 GMT 2 itsasmallworld1 said:

Do prices go up in your country whenever petrol goes up? (gas)
Everytime gas/petrol goes up here ( I have not lived long enough to see it ever go down yet) everything from bread to plane tkts goes up

Yes in South Africa is does.

The main fuel prices - diesel, petrol and paraffin (many people use paraffin in this country for cooking and lighting) - are government controlled. They are slightly cheaper on the coast than in land, but on a monthly basis they are adjusted and even though our currency is very weak at the moment, we are ting at R1.27 decrease on Wednesday that is nearly 10% as I think it is about R12.80 at the moment. But I can guarantee that food etc won't go down.

1. how do you cook or light anything with paraffin? (serious q, isn't that the thing that keeps the candles straight?)
2.do you mean you are having a devaluation? (I do not understand what your R1.27 andR12.8 means)

[missalaska]

you can use paraffin in a stove or a lamp it is called illuminating paraffin.


Stove as such:



Lamp as such





Sorry I see I wrote ting instead of expecting in my sentence - no the fuel price is dropping by 10%.
Every month we get a government commentary about how the exchange rate and per barrel price have affected their ability to set the price this month. Usually it goes up, this time it is dropping considerably.

Nevermind the the Rand dropped because of a parastatal's inability to keep our electricity going.....

[vinnyd]

itsa, I don't know the Spanish words, but in the US (and maybe Canada) paraffin is a petroleum-derived wax, but in the rest of Anglophonia it is what we call kerosene, a liquid fuel used for illumination (and sometimes cooking and heating).

[itsasmallworld1]

Ah thanks, vinny, that explains.
Parafina is the material with which you make candles here. Like a wax. Wondered what the combustible in it was

[missalaska]

I call that paraffin wax.