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Strategies & Market Trends : Currencies and the Global Capital Markets
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To: Paul Berliner who wrote (2466)8/8/2000 10:30:00 AM
From: Henry Volquardsen  Read Replies (2) of 3536
 
good article. two points.

1) if, as the writer says, OPEC demonstrates an ability to hold this mechanism in place and gives the market confidence in a $22 dollar floor price for the foreseeable future this will encourage a lot more production (eventually). There were a lot of marginal wells that were shut in when oil collapsed. If +$22 oil is likely a lot of that will come back on line. It won't be enough to collapse oil but it may help take the edge off the top. It should also help encourage more exploration.

2) re price of gasoline. In the last paragraph the writer implies that retail prices have not yet factored in the current crude price. Crude has tripled off of its lows. A gallon of gas has only doubled. A gallon of heating oil has not nearly tripled, either. Considering that the real pain lies ahead, current prices should be enjoyed, not scorned.

I don't believe that is accurate. A large component of the retail price of petroleum products is taxes. Those taxes are, I believe, a flat tax (so many pennies per gallon) and not a percentage. So as the underlying cost changes the tax remains the same. This will tend to mute the 'at the pump' price move when compared to crude. As an example lets assume a locality with 60 cents a gallon tax ( I believe there are a number that fall in that range when federal, state and local are added in). If the the underlying product pricing works out to 60 cents then the at the pump will be $1.20. Now if crude triples the underlying cost will rise to $1.80. If the taxes have held constant the at the pump cost will be $2.40. A doubling that reflects a tripling in the underlying.
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