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Thread: Breakdown of the Price of a Gallon of Gas

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    Administrator ucfbrett's Avatar
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    http://www.trackhq.com/Banners/yellowsitesponsor.gif emilio700's Avatar
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    You left out the cost that speculation adds to the price per barrel of crude. If speculators couldn't buy oil futures in the volume they are allowed to, we'd probably be paying $2.50 gallon for gasoline.
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    Senior Member pucsicsal's Avatar
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    There's a lot more to it than that. If you want to geek out on the financials, here's a good place to start:

    The Consumerist Why Was Gas So Expensive?

    Edit, Emilio beat me to it.

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    Administrator ucfbrett's Avatar
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    I just reposted what ExxonMobil had on its site. I seem to recall reading that GoldmanSachs was one of the largest holders of crude reserves in the U.S., which reaffirms your point.

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    Quote Originally Posted by ucfbrett View Post
    I just reposted what ExxonMobil had on its site. I seem to recall reading that GoldmanSachs was one of the largest holders of crude reserves in the U.S., which reaffirms your point.
    Which brings me to this!

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    Quote Originally Posted by emilio700 View Post
    You left out the cost that speculation adds to the price per barrel of crude. If speculators couldn't buy oil futures in the volume they are allowed to, we'd probably be paying $2.50 gallon for gasoline.
    Although speculators can have huge impacts on the short-term price of oil, they have relatively little effect on average prices over the long term, which are ulitmately determined by "current" demand, "current" supply, and expectations with respect to future demand and supply. Over reasonable time frames, speculative price anomolies are driven out by market arbitrage.

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    **** speculators!!!!

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    Chest hair required Olitho's Avatar
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    Quote Originally Posted by Loose Caboose View Post
    Although speculators can have huge impacts on the short-term price of oil, they have relatively little effect on average prices over the long term, which are ulitmately determined by "current" demand, "current" supply, and expectations with respect to future demand and supply. Over reasonable time frames, speculative price anomolies are driven out by market arbitrage.
    I agree. Speculators can only drive up the price if they can buy enough and hold it off the market long-term to drive up prices. But they must eventually sell it which cause prices to drop. Speculators sometime win and sometimes they lose... at least in theory, but then our esteemed legislators bail them out when they lose really big like the guys with the mortgage derivative things. The guys on Wall Street with those should have been allowed to lose their asses, but they convinced us all (at least our esteemed legislators with whom they are very close to) that we needed to bail them out to avoid international financial mayhem. They used the same argument for GM's bailout. They said we would have a collapse in manufacturing. The funny thing is they filed bankruptcy anyway a year later and mayhem did not happen. It just allowed GM to reorganize. It just meant the influential got to get out of the GM losses (read key investors and the union pensions) while the little old retired widow got her bonds cut in value.
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    Quote Originally Posted by Olitho View Post
    I agree. Speculators can only drive up the price if they can buy enough and hold it off the market long-term to drive up prices. But they must eventually sell it which cause prices to drop. Speculators sometime win and sometimes they lose... at least in theory, but then our esteemed legislators bail them out when they lose really big like the guys with the mortgage derivative things. The guys on Wall Street with those should have been allowed to lose their asses, but they convinced us all (at least our esteemed legislators with whom they are very close to) that we needed to bail them out to avoid international financial mayhem. They used the same argument for GM's bailout. They said we would have a collapse in manufacturing. The funny thing is they filed bankruptcy anyway a year later and mayhem did not happen. It just allowed GM to reorganize. It just meant the influential got to get out of the GM losses (read key investors and the union pensions) while the little old retired widow got her bonds cut in value.
    I think Tiny Tim has got her period.
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    dirty smack talker hakeem's Avatar
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    Quote Originally Posted by Loose Caboose View Post
    Although speculators can have huge impacts on the short-term price of oil, they have relatively little effect on average prices over the long term, which are ulitmately determined by "current" demand, "current" supply, and expectations with respect to future demand and supply. Over reasonable time frames, speculative price anomolies are driven out by market arbitrage.
    This. Speculators also have no interest in increasing prices, they just like/need volatility in either direction.

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    Quote Originally Posted by hakeem View Post
    This. Speculators also have no interest in increasing prices, they just like/need volatility in either direction.
    Yup. Lest we stray too far: volatility increases the value of any option - up or down - because it increases the probability of being "in the money."

    Volatility smile - Wikipedia, the free encyclopedia

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    Senior Member apk919's Avatar
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    Quote Originally Posted by hakeem View Post
    This. Speculators also have no interest in increasing prices, they just like/need volatility in either direction.
    For every buyer, there has to be a seller. Someone must be *selling* options, and they'd normally prefer *lower* volatility.

    Are speculators always long volatility?

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    We are straying a bit here; but under the Black, Scholes (and Merton) equation that underlies modern option trading, the value of an option is a direct function of volatility (among other variables), so it is safe to say that buyers and seller's of pure options both prefer volatility - unless they are trading the VIX (the volatility index) itself - or hybrids thereof. The intuitive sense of this is that both buyers and sellers are betting on a change in price, and the greater the volatility, the more likely a price change is.

    Track stuff is better for the soul. As proof, you can see a simplified, MBA level illustration of the actual equation below:

    Black-Scholes Model (Note that "theta", the standard deviation of the stock return, is embedded in d1, d2, and even in N)

    If you want to veer even further off the apex see the (four wheels off) technical blather below:

    Black

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    Senior Member pucsicsal's Avatar
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    Quote Originally Posted by Loose Caboose View Post
    As proof, you can see a simplified, MBA level illustration of the actual equation below:

    Black-Scholes Model (Note that "theta", the standard deviation of the stock return, is embedded in d1, d2, and even in N)

    If you want to veer even further off the apex see the (four wheels off) technical blather below:

    Black
    I'd say there's almost certainly an app for that

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    MJM
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    Gas (oil) is expensive because we keep fighting wars in the middle east to gain control of oil fields / shipping lanes but then give it back to the a-holes who fund terrorists. They hate us already and call us imperialists, I say we just take it.

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    MJM
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    Oh, and oil is expensive because it is priced in dollars and we just keep printing those so it's like we are devaluing our currency the price just goes up.

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    Senior Member apk919's Avatar
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    Quote Originally Posted by Loose Caboose View Post
    We are straying a bit here; but under the Black, Scholes (and Merton) equation that underlies modern option trading, the value of an option is a direct function of volatility (among other variables), so it is safe to say that buyers and seller's of pure options both prefer volatility - unless they are trading the VIX (the volatility index) itself - or hybrids thereof. The intuitive sense of this is that both buyers and sellers are betting on a change in price, and the greater the volatility, the more likely a price change is.

    Track stuff is better for the soul. As proof, you can see a simplified, MBA level illustration of the actual equation below:

    Black-Scholes Model (Note that "theta", the standard deviation of the stock return, is embedded in d1, d2, and even in N)

    If you want to veer even further off the apex see the (four wheels off) technical blather below:

    Black
    Um, no.

    If you sell an option, you would certainly want lower volatility. For example, if you sell an out of the money call, you'd like the price of the underlying to stay exactly where it is: out of the money right up until the expiration date.

    If you are *long* an option (that is, the exercise of the option is at your discretion, i.e. you've bought a put or a call) then you are long volatility (and hence would like volatility to increase). If you are *short* the option (i.e you've sold a put or call), your exposure to volatility is by definition the exact opposite of the long position.

    The Black-Scholes model gives the value of *owning* an option (i.e. a long position in the option). If you sell the option, the Black-Scholes gives you the value of your liability (a negative value). Hence, increasing volatility causes the value of a short position in an option to go *more* negative, i.e. decrease in value.

    Full disclosure: I've written and traded with option models for investment banks.
    Last edited by apk919; 07-29-2012 at 08:43 AM.
    robburgoon and hakeem like this.

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    Administrator ucfbrett's Avatar
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    ^^ Which is how you afford a Lotus 11.

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    Quote Originally Posted by ucfbrett View Post
    ^^ Which is how you afford a Lotus 2-eleven.
    Fixed it for you.
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    Administrator ucfbrett's Avatar
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    That's what I meant.

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