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Sic Semper Tyrannis

Friday, June 06, 2008

Re: Free gas coming soon!

Tee Bee,

Fact is a number of governments do subsidize gasoline. Meaning, people in those nations do not get the same signal – the signal telling us to cut back – we do. They are using more gas than if they had to pay open market prices for it. However, those governments are finding out, it is very expensive to subsidize that gas and governments are starting to halt the practice. Reading I have done indicates people in developing nations respond more dramatically to rises in gas prices than those in developed nations.

I'm not buying it. Part of his argument is that, while the price per barrel is set based on the cost of production, many places aren't really paying that price! Proven by contorted logic only a Bear Stearns analyst could love.
Here you miss the full picture. China, India, etc are paying full market price for the oil, but do not pass along those costs to their consumers. That is, the real production cost of gas may be about $3.20/gallon (which was a future's prices on unleaded a couple of days ago) but in China & India the consumer pays $2.75/gallon. Guess what? Those people are going to consume more gas than if they had to pay $3.20/gallon. When those nations stop subsidizing gasoline all of a sudden demand drops.

Let us suppose, George Soros offers you gold at $50.00/ounce? George has to buy the gold at market price (or give up the opportunity to sell it at market price) and sell it you. The market is satisfied, you are satisfied, but George is out a fair amount, because I bet you will buy more gold at $50.00/ounce from George than you would on the open market with a current spot of about $900.00/ounce. Same here, China buys the oil at full market price and then turns around and sells it at a loss to it's citizens. When China decides to remove the subsidy, it will be felt by the whole world.

When the price of a product rises fields that were once too expensive to exploit are now in play. The Bakken Oil Fields are a prime example of this. At $135.00/barrel producers can profitably extract like 5 billion barrels of oil, but at $20.00/barrel that figure changes to less than one million barrels.