[Peakoil] Oil futures

[Paul Pollard]

There is a straightforward financial explanation for much of the action of oil 
companies offering to sell oil in 2011 for $70 now.

This is that if we take $70 now and compound it at a commercial rate of 
interest it comes to about 50% more by 2011. Thus the oil companies are 
selling it for at least $105 in 2011. 

On top of this their financial advisers have undoubtedly told them that there 
is a certain likelihood (50%?) that the US$ will be much less valuable 
against other currencies (30% lower?) by 2011. This would suggest a further 
reason (15% extra?)for selling something in US$ now. Together this would mean 
that selling now for US$70 could well equal US$120 by 2011, so the oil 
companies are in effect gambling on a price of $120 by then.

Another piece of advice they might have received is that there is a chance 
there could be global recession by 2011 with less than expected oil price 
rises (brought on by earlier high oil prices?).

Another aspect is that you can be quite certain that the oil companies will be 
willing to sell only a tiny part of their expected output in 2011 for such a 
price on the futures market, so it is a very small gamble by them that the 
price won't be higher.

Given this is a very small gamble by them, the additional non-financial 
reasons that others have mentioned come into play, such as not wishing to 
spook governments into expecting very high prices, which might propel 
governments to gather for their taxpayers the huge windfall gains that are 
likely. 

Also don't underestimate the strength of herd thinking in the 'rational' 
market, the desire not to look like a pessimist/environmentalist in the eyes 
of industry colleagues, etc.

Paul Pollard





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