What the heck is a target price?

You often hear analysts say that they have a particular target price for a stock or a commodity.  That means that in their heads they expect the value of that thing to hit that price over a certain period of time.  But now we have OPEC saying that they have a target price of $75 per barrel of oil.

YEAH RIGHT.

One of two things is the case here.  Either OPEC has no price control, or they are simply lying, and they really just want the price as high as it will go, as it did go in the summer.  I tend to think both.  For one thing, the statement may be a sap to Iran and Venezuela, who have been publicly pushing for a cut in order to get prices back up to stabilize their own oil-based economies.

What seems to have happened with oil is that the speculators had their day both ways.  First they drove the price up, and then they drove it down.  They were helped a little bit by demand having first climbed, and then fallen. Once prices were clearly dropping, they piled on and just drove them down further.

So where is OPEC’s role in setting the price?  How many millions of barrels will they have to cut in order to have a significant impact on prices?  The general economic answer would be that they would have to stop supplying the world with enough oil to meet current demand, a shrinking target, as we speak.

So why have prices stablized at $50 or so?  Who can say?  Perhaps traders believe that demand has leveled off and is now stable.  Perhaps there is simply a consensus view as to what production and the econony will be 90 days from now, and it is reflected in that price.

Two things have happened this weekend that should make Monday trading very interesting.  First, Black Friday has come and gone.  This will give some indication as to the state of U.S. retail, and hence a good portion of the economy.  Second, OPEC has said that they will not cut current production levels.

If Black Friday turns out to have run red, then we may well see yet a larger drop in demand, based on lower production.  Butt his depends on whether or not producers have already anticipated a miserable Christmas season.  Even so, Monday will be very interesting.  When you see reports about this weekend’s retail sales, think of oil.

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Oil and Us: Friedman gets it right (for once)

Thomas Friedman of the New York Times  today on the matter.  While I don’t think much of some of his other opinions I found this piece by Thomas Friedman of the New York Times very much aligned to my own thinking.  At some point or another we will have to come to terms with actually conserving energy.  In the meantime, however, there is a game going on, and the world consumer is a participant, whether we like it or not.  Things you can do to not play include these:

  • Don’t travel
  • Telecommute
  • Don’t use air conditioning
  • Live in a house or apartment with good insulation

It was about 29°C outside and 23° inside my home office as I wrote this post.  Here’s a little piece of humor I alluded to earlier: we have two gas guzzling cars, but how much does it matter if you don’t drive them?  That first bullet is hard for me and for our family, with relatives and friends so far away.  My recollection is that an efficient airplane gets you about 20-30 passenger miles per gallon of fuel.  As I travel to New Hampshire this week that will be a round trip distance of over 7,500 miles, which equates to about 250 gallons of fuel.  Put another way, I normally use about 13 gallons of fuel per month in my car, and so one plane trip to the United States is greater than my entire year’s use of gasoline.  This is one of five trips I’ll make across the pond this year, nevermind those we’ve caused relatives to make.  I’m as bad as the next person, I suppose.

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Oil

Gasoline PumpAnyone not under a rock can’t help but notice the price of oil having skyrocketed.  $4.00 per gallon prices may seem like a lot, and indeed they are compared to what they were, and so President Bush has decided to wage a war to attempt to get domestic production up.  That means drilling off the shores of Florida and California and in the ANWR National Reserve in Alaska.

It’s a smooth political move.  He figures now that prices are high he can play this card.  However, many economists would disagree that this would do a thing to bring down the cost of oil.  First of all, many believe that speculators are stepping in and buying up oil and storing it, thus driving up demand.  These guys have a lot of money and might well be able to absorb any increased supply.  The proof is what happened when Saudi Arabia announced that it would increase oil production by 200,000 barrels per day.  Prices went up.  The fact is that the Commodity Futures Trading Commission has been asleep at the wheel.  These people are responsible for keeping speculators in check, and where they fail, we could sink speculators hard by selling lots futures from the Strategic Petrolium Reserve.  That would really stick it to them.

But even if prices had gone down, the increased retrieval of oil doesn’t translate into the increased production of gasoline, as we are driving our refineries to capacity.  Building new refineries in the United States is as popular as drilling, because it is a messy business with serious environmental consequences.  You can trust me on this: I come from New Jersey, home of toxic waste.

Fortunately the President’s efforts (and by extension those of Senator McCain) to spoil our shores and Alaska are transparent.  Unfortunately, our energy dependence problem will not go away any time soon.

In case you’re wondering, yes I am insulated just a bit by the oil increases.  A small fraction of those increases have come from the weakened dollar.  However, the dollar has stablized but oil prices have not.  The way I am more insulated than I was in California is that I now have a commute from upstairs to downstairs instead of a 120 mile round trip commute.  This is better than a Prius, but sometimes lack of colleague contact is a problem.

But our house is heated with oil, and many of the products we use require energy to create.

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