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The End of Per Unit Pricing for Energy?

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Joined: 20 Mar 2006
Posts: 1273
Location: Kent (East Hill), WA

PostPosted: Fri Dec 05, 2008 6:48 pm    Post subject: The End of Per Unit Pricing for Energy? Reply with quote

Prices are plunging for oil...

Dec. 5 (Bloomberg) -- Bets that oil for January delivery will fall below $20 a barrel were the most active options contract in electronic trading today, a day after Merrill Lynch & Co. said oil may drop to less than $25.

It leads me to wonder...why is it that we use per unit (barrel) pricing for energy sources like oil.

Oil is in the ground. The energy stored in oil is there prior to any activity of man. Man does not add energy to the oil.

Businesses extract, refine and transport the oil -- but the processes used are by and large automated (even cargo tankers travel by autopilot). The marginal cost of the last barrel of oil out of the well is near zero as the fixed costs of getting the oil from the well to the gas tank are trivial in an established system. And when you think about it, a barrel, 42 gallons of oil, compared to the total reservoir of an oil well -- or of all discovered oil -- is near nothing.

Even exploration is a very small percentage of profits from the oil companies...most of the monies are "extra profits" that are paid as dividends and salaries.

This is why prices are ripe to fall...but this time might be the final plunge. As information technologies bring us closer to perfect information, we find that most of the fees along the way for oil are highly artificial tariffs imposed by entities within the supply chain. Since these profits are far in excess of costs and largely artificial -- that is, not depending on any relationship of input to output -- they can be arbitrarily set. Well, you may then say, yes, but the market sets the price. True -- if there is competition. But if there is collusion, the price goes up to infinity. If there competition, then the price goes to near 0 per barrel, because the marginal cost of a barrel of oil is just about that...
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