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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: quehubo who wrote (64383)	1/5/2003 11:21:15 AM
From: John Carragher	Read Replies (1) \| Respond to of 281500

One reason is just in time inventory... another is the change in the way business in conducted... Oil companies years ago depended on their refineries for sole source of supply.. for example ,, heating oil would come up the colonial pipeline from Tx (most refineries) into the northeast all summer long to build inventories .. This was done to be able to meet demands in the winter months for home heating oil... It was much cheaper to ship in summer months when there was available capacity on the line vs in winter when the line was in full demand and not enough room to keep up with the demand... Ships in winter also run into Northeastern storms, shipping is more expensive than pipeline, etc. So there was a big incentive to find storage , where ever , to store heating oil... It was also a by product of the gasoline being manufactured to meet summer driving.. Then came future contracts,,, New York Harbor price where you could buy and sell contracts of oil ... This changed the whole supply system...Oil could be purchased in the open market at ny harbor prices sometimes cheaper than the laid down cost (delivered cost into storage in Northeast) during the summer... Erratic swings in the price of oil also generated huge losses for firms when the spot market prices fell below the cost of storage... This went on for the first two years and the losses proved it was no longer the right business decision to invest in high inventories that may be worth a lot less in the coming months.... Just in time inventory became more of the norm... Additional product requirements would be purchased on open market. So you can see wild swings in cost of oil does no one any good.. It makes it difficult to plan returns on investments .. do you drill a new well.. What will the barrel of oil be worth when the well is in production.. vs what will the cost of the investment.... I cannot tell you what the supply situation is today.. the distribution discribed was 10/20 or so years ago. I am sure a lot of product is delivered today on the open market..if supplies are tight... Right now the companies that asked Bush to open up the SPR do not want to pay the inflated speculative prices on the open market... One other thing that was introduced several years ago was let the consumer buy their fuel requirements for the winter on a pre buy price... This reduced risk to consumer and industry... I expect they now use a balance to determine what is best inventory situation.